As a small business, you are most likely eager to find ways to bolster your finances. Having some flexibility when it comes to funds is always advantageous, particularly when you need to upgrade equipment or renovate something at your physical location. However, not every small business is capable of receiving a term loan from a bank. That is why Merchant Cash Advances (MCAs) have become an option for many small business owners, as they enable quick cash in hand without a rigorous application process. Is a Merchant Cash Advance right for you? Let’s discuss the pros and cons to help you decide.

Key Takeaways

• Merchant Cash Advances offer businesses quick access to capital without the need for extensive paperwork or collateral.
• MCAs are not classified as loans but are instead cash advances, with repayment based on a percentage of daily sales.
• Pros of MCAs include quick access to funds, flexible repayment terms, no collateral required, and a simple application process.
• Cons of MCAs include high costs, potential impact on cash flow, limited eligibility criteria, potential for debt cycles, and lack of consumer protections.

What is a Merchant Cash Advance (MCA)?

Also known as an MCA, a Merchant Cash Advance is an alternative form of lending that does not come from a traditional bank or the Small Business Administration (SBA). Instead, an MCA allows for small business owners to receive a cash advance in exchange for a portion of future credit or debt card sales. The nature of MCAs makes them very flexible, which is good for business owners who need access to capital quickly and without all the paperwork. Since collateral is usually not required, MCAs are also more accessible to newer businesses.

How Does a Merchant Cash Advance Work?

You may noticed but Merchant Cash Advances are not loans in the traditional sense of the word. Instead they are indeed a cash advance. When you apply for a Merchant Cash Advance, the lender will look over your business’s receipts to figure out your financial state and dependability. Some lenders may review a business credit report, as well, but it is typically the sales that play the greatest role in getting you approved for a MCA.

If you are approved, the MCA lender will take an agreed upon percentage of the daily sales until your cash advance has been repaid. This percentage—known as a “holdback rate”—will range from 5% to 20%. The lender will retrieve their holdback rate through one of three methods:

• Automatic Deduction: The MCA lender will withdraw the agreed amount from your credit or debit card after a sale. The better your credit or debit sales, the faster you repay your debt. If revenue drops, the amount you repay also decreases.
• Direct ACH Withholding: The company will remove a fixed amount from your estimated monthly revenue directly from the business bank account until the cash advance has been repaid.
• Lockbox or Trust Account: While funneling money through a third party, the MCA lender takes their share of your revenue then sends the remainder to your bank account.

What to Know About MCA Rates and Fees

Unlike traditional loans that collect interest, a Merchant Cash Advance accrues money with something known as a factor rate. The factor rate for MCAs can vary depending on the lender and the unique characteristics of your business, ranging from 1.10 to 1.5. Since MCAs fall outside the classification of traditional loans, the regulatory safeguards that cap rates and fees for banks may not apply to them. Consequently, MCA providers have the leeway to impose substantial fees, and some may not fully disclose these fees upfront.

Several factors influence the determination of your factor rate, including your industry, business tenure, personal and business credit scores, financial records, and debit and credit card revenue. Similar to other forms of financing, if your business appears to pose a higher risk, you may end up with a higher factor rate.

Apart from the factor rate, MCA providers may levy additional charges, such as an origination fee, which could reach up to $3,000. These ancillary fees can significantly augment the overall cost of your financing.

What are the Pros of MCAs?

Having learned a bit more about Merchant Cash Advances, let’s take a look at what makes MCAs a beneficial choice:

• Quick Access to Funds: MCAs provide businesses with fast access to capital, often within a few days of approval, making them ideal for addressing urgent financial needs or seizing time-sensitive opportunities.
• Flexible Repayment: Unlike traditional loans with fixed monthly payments, MCAs offer flexible repayment terms based on a percentage of daily credit card sales. This ensures that businesses repay more when sales are high and less during slower periods, easing cash flow management.
• No Collateral Required: MCAs are typically unsecured, meaning businesses are not required to provide collateral to secure funding. This reduces the risk for businesses, especially those with limited assets to pledge as collateral.
• No Fixed Monthly Payments: Since repayment is based on a percentage of daily credit card sales, there are no fixed monthly payments with MCAs. This can be beneficial for businesses with fluctuating revenue streams or seasonal fluctuations.
• Simple Application Process: The application process for MCAs is usually straightforward and requires minimal documentation compared to traditional loans, allowing businesses to access funding quickly and with minimal hassle.

In short, MCAs are a flexible option that may be advantageous to businesses that do not meet the requirements of a traditional bank loan.

What are the Cons of MCAs?

Despite the numerous benefits of choosing a Merchant Cash Advance, you must also way the following downsides:

• High Costs: MCAs often come with higher fees and interest rates compared to traditional loans, resulting in higher overall borrowing costs for businesses. The factor rate used to calculate repayment amounts can translate to a high effective annual percentage rate (APR).
• Impact on Cash Flow: While MCAs offer flexibility in repayment, the daily deductions from credit card sales can significantly impact cash flow, especially during slow periods. Businesses may experience cash flow challenges if sales decline unexpectedly.
• Limited Eligibility Criteria: MCAs may have stricter eligibility criteria compared to traditional loans, limiting access to businesses with strong credit card sales history or specific industries. Businesses with poor credit or low credit card sales volume may struggle to qualify.
• Potential for Debt Cycle: Due to the high costs and daily repayment structure, some businesses may find themselves trapped in a cycle of debt with MCAs, especially if they rely on multiple advances to cover ongoing expenses.
• Lack of Consumer Protections: MCAs are not regulated in the same way as traditional loans, leaving businesses vulnerable to predatory lending practices, unclear terms, and potential disputes with funders. It’s essential for businesses to carefully review the terms and conditions before accepting an MCA offer.

Looking for a Merchant Cash Advance? Contact New Bridge Merchant Capital Today!

Merchant Cash Advances (MCAs) have numerous advantages and disadvantages that businesses need to fully consider before moving ahead. That said, if you are prepared and know that you will be receiving numerous credit sales, a MCA can be easily managed and repaid, all the while giving you additional capital to work with.

Ready to explore the possibilities with Merchant Cash Advances (MCAs) from New Bridge Merchant Capital? Contact us today to learn more about how MCAs can provide the funding solution your business needs to thrive. Whether you’re looking to manage cash flow, fund growth initiatives, or seize new opportunities, our team is here to help. Reach out to us at 844-228-0593 or fill out the online form to get started. Let’s unlock the potential of your business together.