What is a Merchant Cash Advance?
Here is what a merchant cash advance (or MCA) is… a financial institution whom I will refer to as funders in this article are an organization that purchases a part of your business’ future revenues and the cash advance is distributed as a lump sum.
When making repayments, the payment amounts do fluctuate along with your sales volume. This is so that a business does not get trapped with a big payment. When repaying a merchant cash advance, the payments are automatic as they are withdrawn directly from the merchant account that is used for their credit card and debit card sales. These withdrawals are either daily or weekly. Ask our funding specialist about this.
Basically if your business needs money quickly, this is your best option!
This type of funding transaction can be completed quickly. (3 days is average) The faster you can turn in your one page application, along with some simple documentation, the quicker the approval process!
Amount of funding available is $10,000 to $100,000 are typical transaction amounts. Is this something you could use right now?
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Here is What you Should Know about Merchant Cash Advances
An MCA / merchant cash advance is NOT a loan because there is no interest rate to this type of product. This cash advance product is an advance on businesses future revenues. A factor rate is used instead and I’ll go over that shortly. Don’t worry though it is a very simple math concept and this is what funders use to determine how much they will earn for advancing money to a company.
Repaying the advance is deducted automatically (usually daily), Monday – Friday from generated revenue on a company’s merchant account until it is all paid off.
Here is How it Works…
The future revenue of a company is being purchased by a MCA funding organization. Here at Commvestor Funding, we originate these transactions as we have partnered with several funders.
Here is what to expect when getting started. Funders of merchant cash advances will need to take a look at bank statements and merchant processing statements to determine if you will qualify and how much you will be advanced.
There may be a soft pull of your personal credit as well and is typical for the underwriting process as they want to determine risk before depositing a large some of cash into someone’s business checking account.
Once the underwriting department has all of your required docs and information, it will be evaluated promptly and a decision will be made. We will get notified and contact you to tell you how much the will offer and the terms of the deal for your cash advance.
You can either accept or decline the offer. However if you have an urgent need for cash, this is the best way to go.
Once you accept and the approval is finalized the funds are deposited into your business checking account and this working capital is available for you to use to grow your business.
Three days is the average application to funds in checking account timeline.
Repaying Your Merchant Cash Advance
There are three types of repayment methods that are used:
ACH Withholding: This repayment is very common and is an automatic debit from a companies business checking account.
Split Withholding: The repayments are deducted automatically from the merchant account and are transferred to the funder by your business credit card processor.
Trust Account Withholding / Lock Box Method:
This is where all of your credit card sales are going to be deposited into a bank account that happens to be controlled by the funding organization, who then transfers the money back to the business checking account, minus the payment that is owed.
Next, Lets Go Over How the Repayments are Structured:
1. Percentage of Credit Card Sales
Repayment is a predetermined percentage of your company’s sales. They get this number from what your projected monthly revenue is going to be.
The percentage is not fixed and can change as sales and revenue fluctuates, as such set your expectations of your repayment to change accordingly.
Sometimes this can result into a longer repayment period than originally expected.
2. The Fixed Payment Structure
Based on a businesses monthly revenue estimate, the daily or weekly payment will be based off of that figure.
Since the debit card / credit card sales structured is not considered in this method, the payment is the same every month regardless of sales volume.
Do you remember earlier in this article I mentioned that the cost of a merchant cash advance is based on a Factor Rate? When financing something there is always a cost involved and it is usually in the form of interest and that is what we are all familiar with
Merchant cash advances use a factor rate and here is an example…
If you get an advance of $20,000 with a factor rate of 1.3, you would repay a total of $26,000.
In this case the “interest” cost is $6,000.
Simple math, multiply the cash advance amount by the factor rate.
On the surface this may not seem like a great deal, but one should also consider the APR or annual percentage rate. When considering the interest, time and payments, this is essentially the effective rate. The funders also have to consider their risk to reward ratio. This type of transaction is risky to them considering that this is unsecured working capital, soft credit check and based on a businesses future income.
So yes it does make sense that the fees are high for this type of financial product, but at the same time it provides quick access to large amounts of cash to small businesses all across the United States.
How Much Time to Pay This Off?
Every company and every merchant cash advance funder funding scenarios are different as we all have different needs. Typically these are repaid within 3 to 12 months.
For those who choose to do the percentage of your sales pay back method, determining an exact pay back time line will be difficult because of the fluctuating payments.
On the other hand if your business starts generating higher revenue transactions than when you got the funds, then this could be repaid quicker. If sales go lower, then it may take longer.
Since the price you paid for this money has a factor rate, there is no advantage to paying this off early.
Fast application and processing turn around time. No collateral is required at all. Credit impaired / low credit scores are not a big issue as the business’s income is. Worried about your credit anyway? Contact us and tell us what’s going on.
This is an expensive form of capital although it is a way to get funds for your company. A SBA small business loan would be a much lower cost of financing. Payments are made daily, could interfere with cash flow. These do not report to the credit bureaus, cannot build a credit history with this.
When Should a Merchant Cash Advance Be Used?
An MCA should only be used for short-term financing, and should not be considered a long-term solution for chronic cash-flow issues.
When your business has a need for short term financing or an opportunity arrived and you want to seize it, this will work well for that. If your business has cash flow issues, this would not be a long term solution for that.
If you are unable to get a traditional loan from a bank or the SBA, then this higher priced funding source may be your best solution.
Are your sales seasonal? This can help with inventory purchases, debt re-payments, other unexpected expenses that came up and need to be dealt with quickly and working capital needs.
This works best with businesses that do mostly credit / debit card transactions, since that is what the funders really base their decision to approve.
Time in business is 1 year or more. Will not work for startups or to purchase a franchise.
How to Qualify?
As long as you have been in business for a while and are generating revenue getting qualified will not be difficult. There are not going to be any collateral or down payment requires which makes this a simple process.
Contact us – To Get Started and Find Out More
How to Begin and What’s Needed?
For quick service – Prepare and gather the following documents:
- Our 1 page application
- Your credit score (We show you where to get a free credit report & score!)
- Bank statements
- Business tax returns
- A voided business check
- Your credit card processing statements