As a business owner, you know that sometimes the monthly sales receipts don’t come in fast enough to cover your day-to-day expenses. A merchant cash advance, or MCA for short, is a business financing solution that can help you close the gap. Keep reading for everything you need to know about using a merchant cash advance to fund your business.
What is a merchant cash advance?
A merchant cash advance allows a business owner to receive a cash advance against their future monthly sales. Unlike a business loan, where the finance company will typically seek physical collateral, a merchant cash advance gives you an immediate injection of cash that is secured by the sales that you expect to receive in the near future.
How does a merchant cash advance work?
A merchant cash advance requires an agreement between you and a merchant cah advance provider. This agreement outlines three things:
- The advance amount is how much money the finance company will advance to you upfront.
- The payback amount is how much you will have to repay. It’s higher than the advance amount, so it’s effectively like paying interest. The payback amount is often expressed as a factor rate. For example, a factor rate of 1.3 means you have to repay the advance amount plus 30%.
- The holdback is the amount that the merchant cash advance provider will debit from your account daily or weekly until the entire payback amount is settled. This may be based on a percentage of your sales, and there might be a minimum dollar amount required each period. In some cases, the provider will have access to your merchant account in order to take these deductions directly.
Here’s an example:
Bob’s Barbell Gym needs a $20,000 merchant cash advance to replace some equipment. Bob agrees to a factor rate of 1.3, meaning that he will have to pay back the $20,000 advance plus 30%. That works out to a payback of $26,000. He also agrees to a holdback of 20% of sales, subject to a $3,000 monthly minimum. Since Bob has $18,000 of average monthly sales, he will usually repay about $3,600 per month. At that rate, it will take him just over seven months to fully pay back the advance.
Is my business a good fit for a merchant cash advance?
If fast access to funding is a priority and your business has predictable monthly sales, an MCA could be right for you. Many business owners appreciate that an MCA can often be obtained quickly without the need for a strong credit score or having to provide collateral like real estate or other property. The main downside of an MCA is a higher cost of borrowing compared to some other funding options.
What can a merchant cash advance be used for?
While there are no restrictions on how you spend the money from a merchant cash advance, the relatively high cost of borrowing makes it ideal for projects that will be shorter-term in nature. For example, you could use an MCA to acquire or repair important equipment, restock fast-moving inventory, take advantage of a time-sensitive marketing opportunity, hire a key person, or cover a last-minute expense.
How do I qualify for a merchant cash advance?
The most important qualification for a merchant cash advance is a history of sales revenue. The merchant cash advance provider will look at the longevity, amount and predictability of your revenue to determine how much they are willing to advance, how much you will be required to repay, and what holdback amount they will deduct from your daily or weekly sales.
In order to apply, you’ll likely need at least three months of transaction data from your merchant accounts and/or business bank accounts. You will also need to consent to a credit check and might be asked to provide personal tax returns.
Can I qualify for a merchant cash advance with bad credit?
Yes, you may still be able to qualify for a merchant cash advance even if you have bad credit. This is because the repayment of the advance is secured primarily by the future credit card receipts or other sales receipts of your business rather than by your personal credit. The finance company will generally debit your merchant account or business bank account on a daily or weekly basis until the advance is repaid.
How do I apply for a merchant cash advance?
One of the great things about a merchant cash advance is how quickly you can apply and receive funding. Not every provider is the same, but at Advance Funds Network, we often provide funding within just a few business days.
Here are the typical steps to apply for an MCA:
- Application. You’ll be asked to provide a social insurance number, your CRA business number, and basic information about your business. You’ll typically need to show at least three months of bank statements and merchant account statements, and consent to a personal credit check. Depending how much you are borrowing, you may also be asked to show three years of tax returns.
- Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider. You’ll need to accept the terms of the advance, including the amount, the payback, the holdback, and when repayment will begin.
- Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider. You’ll need to accept the terms of the advance, including the amount, the payback, the holdback, and when repayment will begin.
What are the advantages of a merchant cash advance?
A merchant cash advance can be one of the fastest and easiest ways to fund your business. Here are some of the main advantages:
- Fast funding. If you qualify, you can expect to receive funds within a few business days.
- Simple repayment. Repayment is automatically debited on a daily or weekly basis.
- Easy to qualify. As long as you have a track record of sales, you can potentially qualify.
- No restrictions. Unlike certain types of credit, there are no restrictions on how you choose to spend the advance.
No collateral. An MCA is a cash advance that is secured by your future sales, not a loan that requires you to pledge your home or other assets as collateral.
What are the disadvantages of a merchant cash advance?
Despite its speed and ease, a merchant cash advance is not without its drawbacks. Here are some of the main disadvantages:
- Higher cost of borrowing. Compared to some types of business funding, the cost of an MCA can work out to a higher annual percentage rate (APR) of interest.
- Less cash flow control. With an MCA, a holdback is automatically deducted from your sales daily or weekly, so you can’t decide to defer or skip a payment. You will also generally have to repay the advance within 12 months.
- Doesn’t build credit. Because an MCA is technically not a loan, having one will not help you build a better credit score.
- Not available to all. Businesses that do not have a flow of credit card receipts or similar revenue stream will not be able to access an MCA.
Can I use a merchant cash advance for CEBA loan forgiveness?
Yes, you can use an MCA to refinance your CEBA loan and be forgiven up to $20,000 as long as you first applied for refinancing at your original financial institution by January 18, 2024. If you applied for refinancing by that deadline and were declined, an MCA could be a good alternative to refinance your CEBA loan. Even if you applied and were approved, you can still consider using an MCA to refinance you CEBA loan instead. As long as you receive your MCA funding and make the required minimum CEBA repayment by March 28, 2024, you can have some of your CEBA loan forgiven.
How much of my CEBA loan can be forgiven?
If your original CEBA loan was for $40,000, the maximum loan forgiveness amount is $10,000. To claim this amount, you will need to repay $30,000. If your original CEBA loan was for $60,000, the maximum loan forgiveness amount is $20,000. To claim this amount, you will need to repay $40,000. There is a formula to help you calculate your CEBA loan forgiveness amount.
If you applied for CEBA loan refinancing at the bank or financial institution that issued your original loan by January 18, 2024, you have until March 28, 2024 to receive your funding, make a repayment and have part of your loan forgiven. A merchant cash advance is one of the ways you can obtain the funding you need to refinance your CEBA loan.
What are some alternatives to a merchant cash advance?
As a business owner, you have many financing options, and some of them might be a better fit for you than a merchant cash advance, such as a secured business loan, an unsecured business loan, a line of credit, a credit card, or government financing sources, such as the CEBA loan program. Here are some of the main alternatives to consider:
Secured business loan
A secured business loan could be a lower-cost alternative to an MCA, however collateral will be required. The assets you pledge as security for the loan could be things like real estate, vehicles or equipment. The loan application process can be complex and time-consuming compared to an MCA, and your personal credit will be one of the main criteria used by the lender.
Unsecured business loan
An unsecured business loan does not require collateral and is generally more expensive than a secured business loan, but it could still be less expensive than an MCA. As with any conventional loan, it could take time and effort to obtain approval, and your business financial statements and personal credit history will be carefully assessed.
Line of credit
One advantage with a line of credit is that you may only be required to make interest payments, unlike a regular loan, which will require you to pay both principle and interest, or an MCA, which will require you to remit a holdback. This can give you more flexibility with your cash flow. The cost of a line of credit will depend on whether it is secured by providing assets as collateral, or unsecured, meaning it is backed only by the creditworthiness of you and your business.
Business credit card
A business credit card can be very flexible, as you are free to spend up to your limit without the need for approvals. However, the limit may not be enough for your business funding needs and the rate of interest will generally be high. A business credit card can be handy, but it may not be sufficient to replace an MCA or other forms of business financing.
How can Advance Funds Network help with a merchant cash advance?
Advance Funds Network is your gateway to business funding solutions of all kinds. If your business has been running for at least three months and has sales of $15,000 or more per month, you could qualify for an MCA. But why wonder? Apply online in minutes and you’ll hear from us soon with the best available funding options. You can also connect with a dedicated Financial Advisor now at (866) 480-2611.
