Depending on the needs of the business, as well as considerations like credit score, revenue, and time in business, one of the best choices for small business funding may be a merchant cash advance.
In the world of bad credit business finance particularly, a merchant cash advance can often be one of the easiest forms of small business funding to qualify for, and can be a lifesaver for sales-oriented businesses in need of an infusion of capital.
In this guide, we’ll focus on merchant cash advances – what they are, how they compare to other small business funding choices, and why they are such a good choice of business funding with bad credit/for bad credit customers.
What is a Merchant Cash Advance?
First, let’s start with the basics. A merchant cash advance, sometimes called an MCA loan, is a type of merchant funding. That means it’s designed for businesses that function as merchants, with high rates of sales.
In particular, credit or debit card sales are essential, since that’s what merchant cash advances are built on – more on that in a minute.
Small businesses that don’t generate significant revenue in the form of credit or debit card receipts are generally not well-suited for a merchant cash advance, and will find other types of small business funding more suitable for their needs.
In a sense, a merchant cash advance is a type of loan, as you receive the amount of the advance up front as a lump sum payment. You also have to repay the merchant cash advance in full over time, along with an interest rate.
In this case, it’s called a factor rate. It’s not tied to a specific calendar date or repayment schedule in the way a small business loan would be. Rather, the amount you owe on a daily or weekly basis is dynamic, and based on your credit or debit card sales.
If sales are low, the amount owed at that time will be low. If sales are high, you’ll be paying the merchant cash advance off more rapidly. This flexibility, and being tied to the sales performance of the business, make merchant cash advances extremely attractive for many small businesses.
The form of repayment for a merchant cash advance is an automatic deduction from credit or debit card sales receipts.
It’s low maintenance, and the business owner doesn’t need to monitor it, manually make deductions or adjustments, or remember to send in payments by a certain due date.
But because of this, it’s really only ideal for businesses that generate debit or credit card revenue – shops, restaurants, boutiques, some service businesses, dental, vet, or health offices, and similar.
Businesses that primarily receive their revenue in the form of checks or electronic transfers, and aren’t engaged in direct sales with credit or debit card transactions generally won’t qualify for a merchant cash advance.
How Merchant Cash Advances are Different from Small Business Loans
As you can see from the above description, while merchant cash advances can be compared to small business loans and other traditional loan and credit products, they are distinctly different in their repayment methods and in their duration, which is tied entirely to sales and not based on a set number of months or years.
Like many small business loans and other small business funding products, merchant cash advances are typically unsecured, meaning there are no collateral requirements.
Of course, sales are highly volatile, and can always change. But a proven track record of merchant sales by a business provides a bit more of a “sure thing” stable income stream for repayment for lenders than with other unsecured small business funding options.
The key difference, however, remains in the repayment schedule. Almost all other forms of business funding, especially business funding with bad credit, usually provides a lump sum of money, or a dynamic facility to borrow against (in the case of a line of credit), on which the outstanding balance must be repaid with interest.
They require payments made either daily, weekly, biweekly, monthly, quarterly, annually, or on some other recurring schedule that is determined at the time the loan is granted, and based on elapsed time.
This means that, no matter how the business is performing, a certain amount of repayment will be required on a certain date. Merchant cash advances are different, in that they are totally dependent on sales to be repaid. There is no $X amount due by Y date on the calendar.
Rather, as a source of merchant funding, merchant cash advances mean you’re pre-selling future debit and credit card sales revenue at a discount to the lender. If you make more money in sales, the loan is repaid more quickly.
If you don’t, and sales take a downturn, you’re not left with a massive payment due this week that you can’t possibly afford. It’s one of the best kinds of merchant funding options that really accommodates the variable, volatile, cyclical nature of sales in many business categories.
Why Merchant Cash Advances are Ideal Business Funding with Bad Credit
Because of the reduced risk to lenders with merchant cash advances, and the generally smaller overall limits on the amounts available to borrowers from a merchant cash advance, this form of small business funding is often among the easiest for businesses to obtain.
The relatively low eligibility or qualification requirements coupled with the dynamic repayment nature present a very low risk for borrowers, and a reasonably low risk for lenders, such that they are a preferred choice of business funding with bad credit.
Other small business funding options may be out of reach, even small business loans designed for bad credit customers. But merchant cash advances are among some of the most accessible forms of small business funding that any lender offers.
This is especially true when you borrow from a non-bank, private lender, as they usually have even more easily attainable qualification requirements than banks and financial institutions.
Merchant Funding and Small Business Funding Options from BizFly Funding
If you’re interested in a merchant cash advance, or any other type of small business funding, then you should consider BizFly Funding.
They’re exclusively focused on providing funds for small businesses, and offer competitive rates, large loan amounts, a diverse portfolio of options, and outstanding customer service.
You can apply online and learn more on their website, http://bizflyfunding.com.
Frequently Asked Questions about Merchant Cash Advances
A credit score of 500 is generally considered the lower limit of eligibility for many non-bank, private lenders. Banks and financial institutions typically wouldn’t consider a small business for any kind of small business funding with a credit score of 500.
However, at BizFly Funding and other private lenders, provided you meet the other eligibility requirements, some small business loans for bad credit customers, and often merchant cash advances, are available at that credit range.
In the simplest terms, a merchant cash advance provides you a lump sum of cash, like a small business loan.
It is repaid by taking automatic deductions – a fixed percentage amount – of all of your debit and credit card sales, until the loan’s principal and interest have been repaid.
Repayment is tied to sales, not a calendar date, and is dynamic to reflect the variable and dynamic nature of your business’ revenue stream.
Merchant cash advances often have somewhat higher interest or factor rates than fixed-term small business loans. This is because of the dynamic repayment nature of the merchant cash advance.
The lender has no way of knowing how long it will be before they are repaid in full. That is a known quantity with a fixed-term small business loan or similar term product.
Because it is open-ended, and dependent not on the calendar but your business’ performance, that convenience and privilege for you, the borrower, costs a bit more, in the form of somewhat higher rates.
The flipside is that merchant cash advances are among the easiest forms of small business funding to qualify for, and present some of the lowest risks for the borrower.
Your merchant cash advance is repaid automatically based on your debit and credit card sales.
Since that usually has to be your primary form of revenue in order to qualify, it’s a good bet that your merchant cash advance will always be paid off first out of any debts you may have.
The remaining revenue from these sales, and any cash, check, or electronic transfer sales, can then be used to pay off all your other debts and operating expenses.
The minimum credit scores required for different kinds of small business loans and small business funding products will vary significantly from lender to lender.
Typically, even private lenders don’t offer credit or loans with scores below 500.
A minimum score of 550, 600, 650, or 700 is not uncommon, depending on the type of small business funding, the lender, and the amount and term of the loan.