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.
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.
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.
One of the main considerations when trying to decide between a term loan and a line of credit is how much money you need and when. With a business term loan, the lender provides you with the full amount of the loan right away and payments begin immediately. With a line of credit, you can draw money when you need it, and only make payments on the amount you have drawn, which can lead to lower interest costs over time.
Here’s a comparison of a term loan versus a line of credit:
Phil’s Physio took out a business term loan for $20,000. Phil signed a loan agreement saying that he would pay the loan back over 12 months at 16% interest. After making 52 weekly payments, Phil paid off the loan, and his total interest cost was roughly $1,659.
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.
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.
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.
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:
1.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.
2Approval. 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.
Funding. Your merchant cash advance will be deposited to your business bank account. Depending on the terms of your arrangement, you may be required to switch to a new credit card processing machine in order to facilitate the holdback.
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.
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.
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:
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