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The SMB Merchant Cash Advance Guide

Merchant cash advance (MCA) companies in New Jersey are here to help when a business is running short on cash. The lender can deliver funds in a few days, and they often don’t have strict requirements like traditional loans. If you want to learn more about how a merchant cash advance can help your business, here is our complete guide to this funding source.

What Is a Merchant Cash Advance? (MCA Loan Meaning)

What Is a Merchant Cash Advance? (MCA Loan Meaning)

While a merchant cash dvance may seem like a loan, it is technically an advance payment against a business’s future income. The lender will provide the company with a lump sum payment. That funding will be automatically repaid by a set percentage of daily debit or credit card receipts, plus an additional fee. The lender will often look at the business’s credit card processing statements. With that information, the lender knows whether the borrower can repay the amount through the daily sales from the card statements.

In New Jersey, Merchant cash advances are a quick and easy way to secure funding for a business. With a fast approval process, no collateral is required, which can benefit many small businesses. Also, these merchant cash advances are another option for those without perfect credit. A merchant cash advance can be used for a variety of business uses.

The fees for an MCA are usually higher than other types of loans and are often based on the borrower’s ability to repay the borrowed amount per month. Lenders will establish the rates based on the business owner’s creditworthiness. If a business has a solid stream of debit or credit card payments, the lender will be more likely to charge a smaller fee.

Why Apply for a Merchant Cash Advance for Your Small Business?

A business owner can use a merchant cash advance in New Jersey for various uses. Some business owners want to balance their cash flow during certain seasons, while others need to fill a gap in funding. Whatever the need, many business owners will find that these cash advances are a very beneficial way to get more funding for their business. A merchant cash advance is an excellent option if you are:

  • Dealing with seasonal money issues
  • Looking to purchase new inventory or expand business operations
  • Needing temporary cash flow assistance
  • Meeting payroll expenses
  • Paying due debts
  • Requiring cash to pay for unplanned expenses or payments

How Does a Merchant Cash Advance Work?

A merchant cash advance is a good alternative for those businesses with a steady revenue stream from debit and credit card sales. The advance lump sum amount is based on the business’s financial health. As previously stated, the borrower will agree to pay the lender back with a percentage of the daily credit or debit card sales. That advance amount and fees are known as a factor.

For example, if a business has borrowed $20,000 with a factor rate of 1.50, the lender will collect $30,000 from the borrower, which is $20,000 times 1.35. In this case, the fee for this merchant cash advance is 50% of the borrowed amount.

Many times, the repayment periods will range from three to 12 months. Usually, higher credit card sales mean that the business owners will quickly pay off the borrowed amount.

Look at another example. A lender could deduct 10% of the monthly credit card sales until the borrower has repaid $30,000. If the daily revenue totaled $4,000, the daily repayment would be $400. The merchant cash advance lender will take out that amount every day until the advance is paid back. From the example above, if the average credit card repayments were $400 for each day, then it would take 75 days to repay the loan.

How Much Does a Merchant Cash Advance Loan Cost?

A traditional type of loan will have an interest rate, but a merchant cash advance is different. A merchant cash advance will have a factor rate ranging from 1.14 to 1.48. The factor rate is the percent the business owner will owe on the loan. Unlike a standard interest rate, the factor rate is expressed in decimals.

In many instances, the merchant cash advance will include set-up, processing, and payment fees, which could double the cost of the loan. Business owners will pay only when they withdraw funds. Over time, the business owner can repay the withdrawal amount and additional flat fees.

Many business owners want to know the actual costs of a merchant cash advance. These total costs will depend on a few factors, such as:

  • Amount advance: the lump sum of cash advance to the business
  • Factor rate: the multiplier used to determine the business owner’s payback amount
  • Administrative costs: the required fees for the merchant cash advance, including origination, administrative, and closing fees.

How to factor these terms into the total amount of the merchant cash advance? Business owners can use a simple equation that includes the amount for cash advance multiplied by the factor rate, which is usually 1.15 or 1.25 times, plus any administrative costs.

Applying for a Merchant Cash Advance - New Jersey

Applying for a Merchant Cash Advance – New Jersey

The process is fast and straightforward when it comes to applying for a merchant cash advance. Generally, there is not a complicated loan application that needs an endless amount of documentation. Many times, businesses can get a cash advance in a few days. These applications can be completed online. Some of the business documentation needed include:

  • Bank statements
  • Business tax returns
  • Credit and debit card processing statements
  • Credit score
  • Driver’s licenses or state ID cards
  • Voided business checks

A merchant cash advance could be an excellent solution to financing gaps for someone with a new business, low credit rating, or limited assets. The eligibility for a merchant cash advance will vary from lender to lender. For example, one lender might require the owner to maintain at least $2,000, while others may need $5,000 in monthly credit cash transactions. Also, some lenders might not lend money to you if the business has been in operation for less than six months, while others may need the company to be in business for over a year.

While there are no standard minimum requirements for these loans, some of the typical ones include the following:

  • Must have a minimum credit score of 500
  • Been in business for at least a year
  • Have an annual revenue of at least $50,000
  • Must have a consistent cash flow

These factors will play a role in determining whether a business qualifies for a merchant cash advance, but they are not the only requirements. Depending on the lender, they may consider many other factors for approval. Before applying for merchant cash advice, always understand the requirement stipulated for the funding.

Merchant Cash Advance Underwriting Guidelines

Overview of Underwriting Guidelines

Merchant cash advance underwriting guidelines are the criteria that lenders use to evaluate the creditworthiness and eligibility of a business for funding. These guidelines vary from lender to lender but generally cover key aspects such as credit requirements, time in business, revenue documentation, collateral requirements, industry restrictions, personal guarantees, outstanding debt, and other relevant factors.

By understanding these guidelines, you can better prepare your business and increase the likelihood of obtaining a merchant cash advance. Let’s explore some of the essential underwriting factors in more detail.

Credit Requirements

Merchant cash advance lenders typically consider the credit history of the business owner and the business itself. While a perfect credit score is not always required, a good credit standing can significantly improve your chances of approval. Lenders may review credit reports from major credit bureaus and consider factors such as credit utilization, payment history, and any derogatory marks.

Time in Business

Lenders also assess the duration for which a business has been operating. Typically, they prefer businesses that have been in operation for at least six months to a year. Longer time in business demonstrates stability and the ability to generate consistent revenue.

Revenue Documentation

One crucial aspect of merchant cash advance underwriting is revenue documentation. Lenders need to evaluate your business’s cash flow and revenue streams to determine the repayment capacity. They may request bank statements, credit card processing statements, and other financial documents to verify your business’s income.

It is essential to maintain accurate and up-to-date financial records to present a clear picture of your business’s revenue.

Collateral Requirements

Merchant cash advances are unsecured financing options, meaning they generally do not require collateral. Unlike traditional loans where assets serve as security, merchant cash advances are based on future sales. This makes them accessible to businesses that may not have significant assets to pledge.

Industry Restrictions

Certain industries may face restrictions or limitations when it comes to obtaining a merchant cash advance. Lenders may have specific guidelines or preferences regarding the industries they serve. For example, businesses in highly regulated industries or industries with inconsistent cash flow may face more scrutiny during the underwriting process.

Personal Guarantees

In some cases, lenders may require personal guarantees from business owners. A personal guarantee means that the business owner takes personal responsibility for repaying the merchant cash advance if the business is unable to fulfill the repayment obligations. Personal guarantees provide an additional layer of security for lenders and may be requested, especially for smaller businesses or startups.

Outstanding Debt

Lenders will also consider any existing outstanding debt obligations your business may have. They assess your ability to take on additional debt and manage the repayment of multiple financial obligations. It is essential to have a clear understanding of your current debt load and demonstrate your ability to manage it effectively.

Other Factors Considered in Underwriting

Apart from the factors mentioned above, lenders may consider additional factors during the underwriting process. These may include the industry’s overall health, market trends, the business’s sales history, and the use of funds. The evaluation process aims to assess the risk associated with providing the merchant cash advance and determine the appropriate terms and conditions.

How Underwriting Decisions Are Made

Underwriting decisions are made based on a holistic assessment of various factors and the lender’s specific underwriting guidelines. Lenders consider the information provided by the business owner, financial documents, credit history, and any additional supporting documents. They evaluate the risk associated with providing funding to the business and determine the terms, rates, and amount of the merchant cash advance.

It is important to note that different lenders may have varying underwriting criteria, so it’s always beneficial to explore multiple options and compare their offerings before making a decision.

What Are the Advantages of Merchant Cash Advances?

What Are the Advantages of Merchant Cash Advances?

For many business owners, the fast approval, quick funding releases, and easy qualification requirements are some of the biggest advantages of a New Jersey merchant cash advance. However, before applying for this type of business financing, you should know the advantages and disadvantages of these funding options. While a merchant cash advance can be a tremendous financial lifeline, they do have a few drawbacks that every business owner should know. With that, business owners can have realistic expectations about what these funding sources can and cannot do for them.

Take a look at the pros of a merchant cash advance.

Fast Approval, Processing, and Funding

A merchant cash advance is an excellent alternative to traditional loans when a business owner needs fast funding. These advances are a quick way to get fast money into the hands of a business owner. In some cases, approval can happen in less than 24 hours, with the funds showing up in less than three days. Many lenders do not have to abide by the same intensive regulations as traditional lenders, allowing them to expedite the underwriting process.

Lenient Qualifications

Before a traditional loan application is approved, the business owner must have an excellent credit score. That is not the case with a merchant cash advance. These lenders are interested in credit card processing statements over credit scores. The lenders will know whether the owner can pay back the cash advance with these statements. As a result, young businesses, startups, and owners with credit score problems can access business financing. While a strong credit score is not a determining factor for approval, it can help lower the factor rate, reducing the total cost of the merchant cash advance.

Flexible Payment Terms

The payment schedule for a merchant cash advance is fluid. These payment terms can be beneficial for businesses going through a seasonal lull. A merchant cash advance will require only minimum payments. That flexibility is usually not offered by other types of loans, like short-term loans that require payment no matter the business’s current sales volume. Merchant cash lenders require a minimum monthly payment for a specific repayment period. Any business owner applying for the merchant cash advance will want to check the fine print of the terms and conditions of this funding option.

High Borrowing Limits

Merchant cash advances do provide businesses with a higher amount of spending power. These advances can range from $5,000 to $400,000. The amount will depend on sales, which means a higher borrowing limit with a significant revenue stream.

No Collateral Required

Many traditional loans will require the borrower to put a personal saving account, home, or other property on the line for the funds. With a merchant cash advance, there is no need for that. Some MCA lenders may require a personal guarantee, but generally, there is no need to use collateral to secure the loan.

Use for Any Business Needs

Business owners can use a merchant cash advance for almost any type of business expense. Cash advances are a great option for many businesses if the owner needs short-term funding for operating costs or must use the funds for emergency expenses.

While there are plenty of benefits with a merchant cash advance, this type of funding also has a few disadvantages.

Cannot Help Build Credit

Credit scores are not necessary for the application process. In some cases, the lenders will not even pull a credit score. As a result, a merchant cash advance cannot help to build a credit score, which could allow you to qualify for better loans in the future. These loans are costly in the long term, especially if a business owner wants to boost their credit history.

No Incentives for Prepayments

Most lenders will require you to pay interest and the loan amount in a specific time. The faster the repayment, the less interest on the borrowed amount. However, since the merchant cash advances use a factor rate, it is a fixed amount that the borrower must pay back. That means borrowers will have to pay the same amount no matter how quickly they pay it back.

Difficult To Budget

Merchant cash advances have a variance in cost that can make it hard to budget on a weekly or monthly basis. Typically, when sales increase, the business has additional revenue to reinvest in other aspects of the company. However, it is different with a merchant cash advance. Higher sales will mean more correlated expenses, which can be difficult for any budgeting plan.

Potential for High APRs

Businesses of all shapes and sizes can access this type of funding. Unfortunately, these cash advances can be expensive for a company with a weak financial history or poor credit score. Merchant cash advances can carry high APRs. These cash advances are risky for the lender, and some businesses can default on the advance. The lenders often need to compensate by charging a higher APR. Along with that, merchant cash advances can be impacted by the repayment speed. More sales mean higher payments and APR for the cash advance.

Alternatives To MCAs

While merchant cash advances are a good option for many businesses, there are a few alternatives.

A business line of credit will expand the working capital for everyday expenses or short-term projects. The line of credit does revolve, meaning the borrower will have access to the total amount after repaying the borrowed portion. Also, businesses will only pay interest on the funds used, not the entire line of credit.

Another type of funding to consider is called invoice factoring. With this, the business can sell the outstanding invoice for quick cash. While the company will only get some of the money owed, it can allow them access to fast funding.

Get Approved for a Merchant Cash Advance

We will work with you at New Bridge Merchant Capital to find suitable funding options for your business. Contact us if you need help selecting the right loan, merchant cash advance, or line of credit for your business.

Work With a Leading Commercial Lender

At NewBridge Capital Solutions, our loan products can help businesses of all sizes. With our exceptional customer service and reputable funding, we have become a trusted leader in the commercial finance industry. If you want to apply for a term loan that can provide working capital for your business, make sure to contact us.
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