What is a Merchant Cash Advance?

Written By: John Tejada Published On: 8/04/18
Summary

A merchant cash advance, or in short MCA, is not classified as a loan. A merchant cash advance is an advance of cash in return for the purchase of future receivables. The advance amount and details are subject to the ebb and flow of revenues and its not a loan due to the fact that merchant cash advances do not have a fixed term, payment amounts are based on the overall holdback percentage of any given business. Merchant cash advances are targeted for those small business owners who do not qualify for traditional loans and are looking for credit rehabilitation to get back into the top tier of loan programs.

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A merchant cash advance allows business owners who accept credit card payments or have other forms of consistent payments or receivable streams to obtain an advance in the form of a lump sum equivalent to their monthly revenues. A merchant cash advance (MCA) is not a loan, but rather an advance of cash with the repayment being from the purchase of future receivables . A small business can apply for an MCA and have an advance deposited directly into its business account within 48 hours or less.

Merchant cash advance providers evaluate risk and weight credit criteria differently than a traditional banker might. An MCA provider looks at the daily credit card receipts, average daily balances, and deposit frequency to determine if the business can pay back the advance in a timely manner. In other words, the small business is selling a portion of future sales to acquire capital immediately. This product works in the favor of business owners because of the ease involved with acquiring funds for their businesses in amounts up to $250,000.

Rates on a merchant cash advance tend to be higher than other small business loan options (sometimes higher than triple digit annualized interest rates). An MCA provider will often approve an advance for a business that might not qualify for a business loan, but has a steady influx of deposits. Any business owner considering this option should make sure he or she understands the details of the contract being offered so they can make an informed decision about potential ROI. Rates on merchant cash advances tend to typically be higher that other small business loan options because of the increased risk associated with dealing clients who do not qualify for prime loan options.

How does the MCA process work?

If you have conducted your own research and feel a merchant cash advance is the right product for you the next step is to find an appropriate funder. Upon completion of the application, you will be requested to provide your 4 most recent months of business banking statements. Once the necessary prerequisites are submitted, the process of underwriting will be initiated. The underwriting process generally takes 24-48 hours followed by the lender reaching out to the client in order to discuss the details regarding the opportunities available. Once the lender and the client come to an agreement, the funds are transferred to the client’s business banking account and the repayment process is initiated with a daily, weekly, or monthly payback structure.

Repayment and Qualifications

Merchant cash advance, or MCA, repayment and specific details vary significantly depending on qualification.

Top Tier

Top qualifying candidates find themselves in a special situation when seeking a merchant cash advance. Unlike the other tiers, the clients that find themselves with a holdback percentage less than 10% earn rates less than 25%. Payment structure varies from daily – monthly with the monthly payment structure costing the most in the long run. Qualifying for a top tier program means that your personal and business credit are 700+, zero negative days have been observed in the past 3 months, strong ending daily balances are observed, 2 years of business tax returns are on hand and showing a net profit, and all financial obligations have been met. In other words, top tier qualifying clients are in overall excellent financial standing.

Mid Tier

Mid tier candidates find themselves with holdback percentages 11-20% and generally will see rates between 30%-38%. Payment structure tends to get more restricted with daily and weekly payment options available. Qualifying for mid tier programs means that your credit may be sub 700, existing loan balances may exist (1-2 balances), and full financials may not be prepared. Sporadic daily ending balances and negative days (nsf’s, returned items) are observed but are kept to a minimal and decent cash flow is present.

Low Tier

Low tier candidates find themselves with opportunities that are deemed more aggressive than the others. Holdback percentages observed in the range from 21-28% are accompanied by daily payments and rates above 38% are set due to the high grade of risk involved with providing funds to the clients falling into this category. The clients finding themselves in this tier generally have multiple loan positions, low deposit frequency, low daily balance average, less than average credit or proof of previous defaults.

Is a Merchant Cash Advance right for you?

A merchant cash advance is an option when a business needs to access capital quickly, has adequate cash flowing through their account each day to make payments on the advance, and the capital acquisition purpose can justify the potentially high expense of the advance. Due to MCA credit requirements being typically less than a small business loan, it is an option for a business that has strong cash flow every month but has a weak credit profile.

Merchant Cash Advance application process.

Merchant Cash Advance alternatives.

A merchant cash advance does not lead to an increase in business credit upon repayment because it’s not a loan. Merchant cash advance providers do not report payment history to the business credit bureaus due to the nature of the advance and minimal requirements necessary to fund a business. As a result, many business borrowers turn to other options, like an online small business loan, which offers many of the same conveniences and potentially at a lower premium than many MCAs.

If you’re considering a merchant cash advance for financing the purchase of quick-turnaround inventory, equipment, an expansion project, or marketing initiative, a three- to 36-month online business loan is another option if you have at least a year in business and annual revenues of $100,000 or more.

Additionally, online business loan providers (like AMP Advance) report your good repayment history to the business credit bureaus and are subject to federal lending laws. Meaning, unlike an MCA, an online business loan may help you build your business credit profile.

AMP Advance is a Miami based industry leading direct funding source out of Coconut Grove, Florida. We help those who are in need of small business financing by providing web based financing options & funding solutions. Our solutions assist small business owners find matching opportunities while assisting small business owners improve their overall financial situations. AMP Advance provides small business loans, business lines of credit, accounts receivable financing, equipment financing, unsecured business loans, and revenue based loans to millions of small business owners nationwide.

1 Comment

  1. […] discussing working capital loans two products fit the role, unsecured business loans and merchant cash advances. A merchant cash advance, or in short MCA, is not classified as a loan. A merchant cash advance is […]

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