For small and medium businesses in need of a quick and hassle-free business loan, a merchant cash advance (MCA) is a really solid solution. Actually, a merchant cash advance isn’t really a loan at all. It’s a buy and sell agreement between two parties. Essentially an MCA is when a lender provides an advance of cash in exchange for a percentage of future credit or debit card sales. This comes in handy when quick working capital is needed for ad hoc projects like equipment upgrades, rental, making payroll, managing unforeseen circumstances or taking advantage of last-minute opportunities. Sometimes a cash advance can be the difference between success and failure in a business. But it comes with a unique set of ‘good’ and ‘bad’ scenarios that are well worth understanding:
CREDIT HISTORY IS NOT A BARRIER TO ENTRY
Unlike traditional lenders like banks, MCA lenders really don’t care about your credit rating. To qualify for a merchant cash advance, you need to have been in business for at least 6 months, turnover of at least $10,000 per month and have an active credit/debit card terminal. Once these key factors are in play – you are well on your way to approval.
CASH COMES QUICKLY
Banks are notoriously overbearing when it comes to qualification criteria. Not to mention their endless paperwork which becomes a highly prohibitive factor. Often, by the time your loan is actually approved, the opportunity requiring the loan in the first place, may well have been lost, changed or new problems may have compounded. Merchant cash advance providers, like Beyond Merchant Capital, however, have a refreshingly simple approach to this problem. As fintech lenders, they welcome efficiency by providing an easy online application that takes mere minutes to complete. They ask for minimal documentation (credit card and bank statements and a lease agreement) and boast a high approval rate in as little as 24 hours!
NO FIXED MONTHLY REPAYMENTS
Merchant cash advance lenders have tailored the cash advance product for retail businesses that have an unpredictable or seasonal turnover. A huge drawcard here is there are no set monthly repayments. Rather the business pays back the amount via a small agreed percentage of each and every credit card transaction. This means that when business is slow, the repayments shrink. Conversely, when business improves, the amount is paid off that much quicker. It’s important to note that the repayment percentage will be decided on against previous credit card turnover so it’s important to familiarise yourself with these figures as it will give you a good indication of what you can expect to qualify for – often 80% of your monthly card turnover.
HIGH APPROVAL RATES
Due to the flexibility of this product, a very high percentage of these loans are approved. In a lendscape dominated by stringent banking dynamics which often exclude retailers, this is an absolute game changer. This bodes particularly well for small or struggling businesses that have little to no options in the formal lending space.
NO COLLATERAL REQUIRED FOR A MERCHANT CASH ADVANCE
Again, as a cash advance is not like a traditional bank loan, there is no collateral required to secure the cash. In essence, the cash advance is calculated in relation to previous credit card sales and then is lent against future turnover. So if your business enjoys high and frequent credit card transactions, there is a good chance of approval, with limited risk.
NO LATE FEES
Because repayments are made via each and every credit and debit card payment, the repayments happen instantly via your EFTPOS terminal. In other words, the MCA lender is paid first, and then the balance of each sale goes into your bank account. The upside of this is you will never pay late fees due to the daily retrieval process.
A product that is a quick and flexible as this one, is bound to come with a few ‘buts..’
HIGHER INTEREST RATES
One such ‘but’ is the propensity for more expensive money. This product can work out to be more costly than a traditional loan. That said, it is a consistent amount which won’t fluctuate if the amount isn’t paid off in a set period of time. Remember though, it’s not actually interest that you are paying. You are paying against an agreed fixed percentage. So be sure to read the fine print to understand exactly what will ultimately be repaid.
Because this product lends against future sales, it is not a traditionally regulated industry. So make sure you work with a reputable and responsible cash advance provider like Beyond Merchant Capital. These cutting-edge lenders (in particular) have a reputable leadership team, sound backing and core industry experience.
MCA MONEY IS MORE PRICY THAN A BUSINESS LOAN
Interest rates on a business loan can range between 6.25 and 12% (roughly). As long as you cover each loan payment on time, avoid late fees, and pay it off within the original term, the APR (annual percentage rate) will be less on the business loan than on an MCA. If you run into another cash crunch, only make interest payments and take longer than planned to pay off the business loan, the cost of that money goes up. Making it a wiser choice if you can absolutely guarantee a predictable outcome. But what business owner would do that? It really all comes down to risk. The higher cost on an MCA deal covers the steeper risk taken on by the lender. This is the trade-off for many of the advantages of an MCA deal.
Unlike Beyond Merchant Capital, many companies that offer merchant cash services hide their fees within their loan products i.e. setup, early exit and daily debit fees. Make sure you understand this from the outset to avoid costly surprises.
THE BOTTOM LINE
In many cases, a merchant cash advance shines as the great option – it’s quicker, more flexible and a lot more inclusive. Often it is the only options for some small and medium businesses. At the end of the day though, while an MCA is an absolutely sound option, as an entrepreneur it remains important to weigh up your options, do your homework on social media, in the press and online. but most importantly, make sure you always partner with reputable and responsible funders, who have your business’ best interest at heart.
Speak with a lending specialist today about funding the growth of your business.