If you run a start-up business or have poor credit acquiring financial support through traditional loans may not be an option. You should consider alternative sources, such as a merchant cash advance, to ease your cash flow issues. An MCA is similar to a personal paycheck advance; a lender issues a lump sum cash advance that is repaid by your business’s future credit or debit card sales. The financing company usually withdraws a percentage of your sales plus a fee directly from your established merchant account. This type of financing is an ideal option to get quick cash for businesses such as restaurants, medical offices and retail shops. Is it the right option for your business?
An MCA offers a financial lifeline to new or struggling businesses with a simple online application and approval process. Typically, approval and the cash advance occur in about a day. Once that money is deposited into your merchant account, you can use it at your discretion, whether that is to invest in equipment, pay your employees or cover an emergency cash shortfall. Finally, your sales determine repayment amounts. When sales are slow, you pay less.
Unlike other types of business financing, MCAs are not strictly regulated; therefore, contracts and agreements may be misleading. Sales percentage and fee charges vary from MCA broker to broker. While it may be easier to acquire, an MCA often costs a business more in the long run. The APR rates are generally higher than other business financing options. In addition, because repayment is made by direct withdrawal from your credit card sales, your business’s cash flow may be impacted. All these issues can lead to a cycle of debt for your business.
A merchant cash advance is structured much differently than a business loan. MCA financing companies use a factor rate, not an interest rate, to assess fees. A factor rate is based upon your business’s financial health and credit rating. The maximum cash advance given is $500K with factor fees ranging from 1.1-1.5. Repayment via your bank or merchant account occurs either daily or weekly.
Before making any decision for your business, you need to do some research and weigh the pros and cons. No one understands your business better than you. After some deliberation, you may decide that a merchant cash advance may be the right option for your business to access funds quickly.