As funding and financing, working capital, and cash flow management are key aspects of managing a small business, it’s surprising that more people aren’t familiar with the merchant cash advance or MCA loans, and what they have to offer.
And while they aren’t suitable for every kind of small business, they do offer some amazing benefits for certain kinds of small businesses, when deployed effectively for short-term capital needs.
Let’s explore the merchant cash advance and the role it can play in small business funding.
What is a Merchant Cash Advance or MCA Loan?
At the most basic level, a merchant cash advance or MCA loan is, as the name implies, a kind of loan. It’s similar to a plain old ordinary small business loan, in the sense that you receive a certain amount of money as a lump sum when you apply.
And, it’s also similar in that you have to pay back the loan amount (the principal) plus interest. But this is where things start to differ.
Instead of an interest rate, you are charged what’s known as a factor rate on merchant cash advance services. In practice they work essentially the same way, though.
The biggest difference is in how a merchant cash advance is repaid. With a traditional small business loan, the loan principal and interest are paid back over a fixed period of time, often called the loan term or loan duration.
Repayments may be required weekly, monthly, or quarterly depending on your loan agreement. That’s not the case with a merchant cash advance, however. Rather than fixed repayments over time, the repayment comes from automatic deductions from your credit or debit card sales.
There’s no collateral requirement, just like in an unsecured small business loan. But you are, in effect, “selling” a portion of your future credit or debit card sales to the lender.
This makes a merchant cash advance distinctly different than other kinds of merchant funding and small business funding options available today.
What are the Benefits and Drawbacks of a Merchant Cash Advance?
One of the key benefits of a merchant cash advance stems from this difference in the way in which the MCA loan is repaid.
Because it’s not tied to a calendar date in the way a normal small business loan is, but rather credit and debit card sales, a merchant cash advance is much more directly tied to the performance of your business.
You aren’t on the hook for a set repayment amount regardless of how your business is doing. Rather, when sales are good, repayment is faster. When sales are slow, repayment is slower. It’s directly proportional to your credit or debit card sales activity.
This can make managing cash flow and other small business financial tasks much easier and less stressful. In addition, it’s relatively easy to qualify for a merchant cash advance service as opposed to many of the other small business funding options that are available.
This is because the risk level is relatively low for the lender. You need to meet certain revenue and time-in-business criteria, of course.
But these usually assure the lender that you are achieving at least a certain level of sales, and therefore can be expected to repay the merchant cash advance without too many issues.
This also means lower credit score requirements for an MCA loan than many other kinds of small business loans or small business funding options.
Merchant cash advances are also easier for small business owners to manage, as there is very little active management that needs to be done. With no fixed repayment dates or amounts to remember, there are no checks that need to be cut and sent to the lender.
Rather, once everything for the MCA loan is set up, deductions from the credit or debit card sales at your business are made automatically. This convenience is highly appealing to small business owners, who have enough on their plate to deal with already.
On the flipside, there are also some drawbacks to merchant loans like these. The interest rate or factor rate tends to be significantly higher than a regular small business loan.
Because there is no set repayment period, and no guaranteed weekly/monthly/etc. payments for the lender, this is a natural tradeoff for the flexibility an MCA loan provides to the borrower.
Is a Merchant Cash Advance a Good Choice for My Business?
A merchant cash advance is ideal for businesses that do substantial sales activity via credit or debit card. That’s one of the key criteria to qualify for an MCA loan, and really the basis for deciding whether or not the merchant cash advance service is right for your business.
Like a regular small business loan, the money is all provided up front, so it may not be an ideal solution if you have variable expenses over time.
In that case, a line of credit might be a better choice. But, assuming you meet the credit or debit card sales portion of the criteria, and need money as a lump sum right away, a merchant cash advance can be an excellent choice.
It’s also good for businesses with bad credit or limited credit history, owning to the relatively easy qualification requirements compared to other small business funding options.
Where Can I Obtain a Merchant Cash Advance?
Many small business funding businesses provide merchant cash advance services. These are usually easier to obtain than seeking a merchant cash advance from a bank or traditional lender.
Companies like BizFly Funding, that focus exclusively on small business funding options, are usually the best choice. They use an online application process for quick approval or pre-approval. They also have relatively attainable requirements for their MCA loans.
That’s combined with competitive interest/factor rates, and excellent, US-based customer service. Most people who apply can receive their merchant cash advance proceeds in as little as 1 business day.
