Let’s talk about merchant cash advances (MCAs). They’re a type of financing that’s not as well-known as credit cards or term loans, but they’re still pretty important. Right now, there are about a million businesses using them, according to the Consumer Financial Protection Bureau.
So, what’s an MCA? It’s a lump sum of cash that a business gets upfront. In return, the business agrees to give a portion of their future sales to the lender. It’s more like a sales transaction than a loan. Businesses often use MCAs when they need cash fast and have a lot of credit card transactions. They’re great for short-term needs like buying inventory, fixing equipment, or filling in cash flow gaps. They’re also a good option for businesses that can’t get traditional loans because they don’t have collateral, have low credit scores, or need funds faster than a bank can provide.
But MCAs aren’t perfect. Financial experts have raised concerns about the lack of regulation in the MCA industry. Since it’s not technically a loan, it doesn’t have to follow the same rules as banks and online lenders. This can lead to high costs and unfavorable terms for small businesses. However, MCAs also have fewer requirements and obstacles than traditional banks, so they can provide additional options for businesses that can’t access traditional financing.
Before you decide to get an MCA, you need to understand exactly what it involves. You should also consider what other financing options are available for your business. Hanna Kassis from Segway Financial says that MCAs are perfect for businesses that meet certain criteria.
So, what is an MCA exactly? According to Kassis, it’s a one-time capital infusion in the form of a lump sum. The business then pays a fixed royalty over a fixed period of time. The amount of funding is usually based on a one-month average of bank deposits or credit card swipes. You’ll need to have a steady and sufficient revenue history to apply for one. Small businesses can often get the money quickly, usually within one to three days. The amounts are generally between $60,000 and $70,000, but you need to have steady monthly revenue of $10,000 a month to qualify.
Kassis also says that there’s a specific set of small businesses that benefit the most from an MCA. These businesses need to have a clear path to revenue and be ready for a squeeze in their cash flow. They should also be able to forecast a steady flow of customers. Examples of businesses that would be a good fit for an MCA include new businesses, businesses that haven’t been in business for 6 months, businesses with an owner FICO below 600, and B2C companies like restaurants, bars, retail stores, and even nail salons.
MCAs are also popular in certain situations. For example, many businesses look for MCAs ahead of holiday seasons. They’re also useful for emergency situations, new product launches, and cash flow gaps.
There are several reasons why an MCA can be a good choice. They’re fast, easy to apply for, don’t require collateral, and have flexible repayment terms. However, you should also understand the details of an MCA. The costs are often expressed in factor rates rather than interest rates, which can make them seem less expensive than they actually are. You should carefully calculate the APR of an MCA and compare it with other financing options.
The timing of an MCA is also important. They can be strategic for capturing time-sensitive business opportunities, like buying discounted inventory from a competitor who’s going out of business. They can also be useful for businesses undergoing a significant pivot or expansion.
If you’re considering an MCA, here’s a step-by-step guide to applying for one:
- Evaluate your cash flow.
- Gather required documents.
- Choose a reputable provider.
- Submit your application.
- Review the offer.
- Use the funds wisely.
- Plan for repayment.
In conclusion, when you’re asking, "What is a merchant cash advance?" start with a clear understanding of how this funding option can help your small business survive and thrive.
