That is often a serious challenge, especially for relatively young small businesses with limited credit history, limited assets to put up as collateral, and similar hurdles. Yet, without access to small business funding, many small businesses can fail.
Fortunately, there is a type of small business funding available that is easy to obtain, even with bad credit, no available collateral, and other business handicaps: a merchant cash advance.
Merchant cash advances, sometimes called MCA loans or merchant loans, may be exactly what your business needs to provide cash for your operations. They present some unique benefits, and operate in a way that is different than more traditional small business loans, for example.
In this article, we’ll take a look at merchant cash advances, including a discussion of what they are and how they work.
We’ll highlight the key benefits or advantages to choosing merchant business funding, and focus on explaining why MCA loans are best suited for certain kinds of businesses (and maybe a bad idea for others).
In addition, we’ll discuss where you can get a merchant cash advance easily and quickly.
What is a Merchant Cash Advance?
A merchant cash advance is a type of business funding that’s not quite a loan, but has a lot of similarities. Specifically, a merchant cash advance provides an up-front lump sum of cash to your business, which you must repay with interest.
In the case of a merchant cash advance, rather than an interest rate, it’s known as a factor rate, but can be considered as comparable. They are usually unsecured, meaning that no collateral is required in order to get a merchant cash advance.
However, merchant cash advances or MCA loans do differ from traditional business loans, particularly in how the repayment process works.
Unlike a typical loan, where you have a set repayment term and frequency, making equal payments on a particular calendar-based schedule, a merchant cash advance has a dynamic repayment mechanism.
It is repaid via automatic deductions from your credit and debit card sales, and is responsive to your rate of sales. That means you don’t need to hit a certain payment threshold each week/month/quarter, in the way that you do with a traditional loan.
Rather, when sales are slow, your repayments are slow, and when sales are booming, your repayment rate is much faster. This forms the crux of how a merchant cash advance works.
Essentially, unlike a loan, where you are being directly lent funds and repaying them over time in cash or electronic means on a set schedule, instead you are pre-selling a portion of your future credit and debit card sales at a discount to your merchant cash advance lender.
The discount (factor rate) is the “cost” of the service, akin to the interest rate with a traditional loan.
These facts and mechanisms provide a tremendous advantage for certain kinds of businesses, and also feed into some of the unique advantages and benefits of merchant business funding, as we’ll discuss below.
What are the Benefits of a Merchant Cash Advance?
Broadly speaking, the benefits of a merchant cash advance (on its own and in comparison to other small business funding options) fall under one of four distinct categories. These include:
Easy to Qualify with No Collateral Required
Merchant cash advances don’t usually require any collateral to be put up by the borrower. This not only reduces the risk to the business, but makes the entire application and approval process go more quickly.
The net result is it’s easier and faster to get your merchant cash advance funds, allowing you to respond to changes in your business and financial situation within days, not weeks or months as with traditional, secured loans.
Available for Bad Credit or No Credit Businesses
While there is some level of risk to the lender or servicer in terms of a merchant cash advance, and this is reflected in the factor rate being higher than that of a traditional loan, there is a corollary for the borrower – that is, merchant cash advances for business owners are often the easiest type of small business funding to obtain.
Bad credit scores, limited or no credit history, and other traditional hurdles to accessing funding aren’t usually a problem when taking out a merchant cash advance.
They’re often one of the only kinds of small business funding that companies with bad credit or a limited credit history can even qualify for, and therefore have great value for those most in need of small business funding.
Repayment is Based on Sales, Not the Calendar
Perhaps the most important benefit or advantage of a merchant cash advance is the repayment schedule, and how it is based on sales, not the calendar.
This makes it much easier for businesses to repay – there are no looming calendar deadlines or dates by which you need to come up with a set amount of repayment.
Rather, repayment comes directly from sales, and is dynamic based on your rates of sales, so you’re never on the hook for more repayment in a given period of time than your sales can support.
This greatly reduces the risk of default for many small business owners, and is one of the primary motivations that many cite in seeking a merchant cash advance.
Simple and Automated Repayment System
Speaking of repayment, the best merchant cash advance loans also offer simple and automated repayment.
Everything can be set up and programmed with your point of sale or credit/debit card processing system in minutes, so that you never need to waste time going online to make a payment, or sending in a check, or anything like that.
It’s seamless, set it and forget it technology that leaves you to focus on more important aspects of running your business.
What Kinds of Businesses are Best Suited for an MCA Loan?
Merchant cash advances are not typically available from banks and traditional lenders. Rather, the best source of the best merchant cash advance loans is private companies, known as non-bank lenders.
These companies often don’t have the same kind of restrictions and eligibility criteria that hamstring banks, because they don’t take depositor accounts and don’t have certain FDIC and other covenants to respect.
Rather, they deal in small business lending only, and can therefore offer a full range of products, including those for companies with bad credit, like merchant cash advances.
These companies often don’t have the same kind of restrictions and eligibility criteria that hamstring banks, because they don’t take depositor accounts and don’t have certain FDIC and other covenants to respect.
The Best Merchant Cash Advance Loans Come From Private Lenders
One of the interesting things about merchant cash advances is that they may not be the best choice for every business, whereas a typical business loan can pretty much be put to good use by almost any business.
Merchant cash advances are really only suited to businesses that do the bulk of their sales, or generate the bulk of their revenue, through credit and debit card sales.
This means restaurants, boutiques, small service establishments, doctor and dental offices, and similar can greatly benefit from merchant business funding.
By contrast, businesses that do most of their sales through trade channels and accounts receivable really can’t make use of a merchant cash advance, as they would never generate any credit or debit card sales to repay the MCA loan.
Merchant Cash Advances from BizFly Funding
One of the best sources for the best merchant cash advance loans in the US is BizFly Funding. BizFly Funding is a leading private non-bank lender, who deals exclusively in small business funding.
With a range of small business funding products, outstanding customer service, fast funding, and easy-to-meet eligibility requirements, BizFly Funding is your one-stop-shop for all your small business funding needs, including merchant cash advances.
To find out more, get pre-approved, or start the application process, visit https://bizflyfunding.com.
Frequently Asked Questions about Merchant Cash Advances
Merchant cash advances are absolutely legal, and a valuable form of small business funding that tens of thousands of small businesses rely on to fund their operations.
MCA loans are available from a variety of non-bank lenders and other sources within the US, and similar forms of merchant business funding are available in a number of other countries and jurisdictions as well (though the details of how they work, eligibility criteria, and similar will of course vary).
Merchant cash advances don’t generally hurt your credit score. They are not treated like a traditional loan, since they don’t operate in quite the same way.
Of course, if you are unable to repay the merchant cash advance, meaning you are generating no sales revenue via credit or debit cards, the matter may be adjudicated in court or through debt collections processes, which would result in a report to the credit bureaus that would negatively impact your credit score.
While merchant cash advances may be colloquially called MCA loans, they are not, in legal and financial circles, considered a formal loan.
Rather, they are a sale, where you are selling your future credit/debit card sales to the merchant cash advance provider, in exchange for a lump-sum payment.
It is possible to get several different types of small business loans and credit products without having substantial money in the bank or assets.
However, even unsecured loans and products like merchant cash advances do have some basic requirements, that include a monthly revenue requirement in most cases.
Therefore, if you are a brand new business, with no assets, no money, and not bringing in any kind of revenue, you generally won’t be able to take out any kind of loan.
In that case, you’re looking more for equity partners or venture capital funding/seed funding.
As mentioned above, banks don’t generally offer merchant cash advances, and may not offer small business funding options at all.
Even when they do, the requirements they put in place can be hard for many small businesses to meet, as a means for the bank to manage risk.
Therefore, your best bet for a merchant cash advance would be to find a reputable non-bank lender (like BizFly Funding, as we discuss below).
