A Merchant Cash Advance (MCA) or Business Cash Advance is a loan variety that lends money to companies and start-ups promptly and efficiently. Business financing options, along with short payment terms of generally 24 months and regular recompenses, paid on each working day, characterize the MCA. The system opposes the usual larger monthly payments of traditional bank loans and associated longer disbursements terms.
Overall, MCA may be used to describe short-term business loans and future receivables of credit card sales. This type of financing is available to businesses, having stable and continual credit card dealing, including restaurants, retail stores, pharmacies, etc.
How Does A Merchant Cash Advance Work?
The process of getting a merchant cash advance is generally a quick one. The foremost step is the identification check of the business that wants the loan. The documentation needed for it include:
- Government-issued identity proof
- Bank and credit card statement processing
- Business tax returns
Once the identification approval is processed and done with, it is only a matter of days before the business receives its borrowed amount. Subsequently, they receive a lump sum amount and pay it back through sales generation to customers.
To pay back the loan amount, the borrower offers a percentage of the sales, as specified in the contract, to the lender daily. It may also be done through the connected merchant account, calculated based on sales processed through debit and credit card. In this case, cheque and cash sales do not count in the daily quota.
The compensations can also be taken directly from the borrower’s bank account through Automated Clearing House (ACH) payments. By this logic, small-scale businesses with low credit and debit sale rates can also qualify for MCA if they opt for ACH repayments.
Borrowable MCA amounts range from a few thousand dollars to over two hundred thousand dollars. Irrespective of the rented sum, the payback time is usually very brief. In most cases, it is about 18 months or so.
Pros of MCA:
MCA has several benefits, some of which include:
- An Effortless Application Process: MCA entails a quick application process, and money borrowing is possible in a day. It is also easy to qualify as, in this case, loan credit history is less significant than sales history.
- Flexibility: MCA allows numerous payment plans and methods and permits the borrowers to use the funds as they see fit. Since the payments depend on a percentage of daily transactions, the debtors do not have to pay back if they have low income. It results in cash flow issues that can lead the business to deeper debt.
- Absence of collateral: MCA loans are unsecured, meaning that it does not tie the borrowers to any collateral. For businesses with limited assets, this feature is a godsend.
Cons of MCA:
The disadvantage of MCA encompasses:
- Potential Cash Flow Problems: MCA requires a specific amount of the borrower’s future sales dedicated to paying back the borrowed amount. This results in cash flow issued that can lead to a deeper debt for the business.
- Comparatively Higher Costs: The cost to get an MCA, as factor rates and not interest rates, is much higher than many other types of funding. Factor rates do not depend on a specific period, and thus, paying off in advance does not help save money.