Merchant Cash Advance 101: What it is, How it Works & More
Many business owners are unaware of a financing option known as a merchant cash advance (MCA). MCAs can be a great solution for businesses looking for working capital but who may not qualify for traditional loans.
In this post, we’ll outline what an MCA is, how it works, and some of the pros and cons of this type of financing. We’ll also provide some tips on how to apply for an MCA and what to expect if you are approved. So, if you’re interested in learning more about merchant cash advances, read on.
What Is A Merchant Cash Advance?
A merchant cash advance (MCA) is a type of financing that provides businesses with working capital in exchange for a percentage of future credit card sales. MCAs are often used by businesses who may not qualify for traditional loans due to bad credit or lack of collateral.
A merchant cash advance works by the lender providing you with a lump sum of cash in exchange for a percentage of your future credit card sales. The repayment schedule is typically based on a fixed daily or weekly amount that is automatically deducted from your credit card sales until the loan is paid off.
For example, let’s say you receive a $10,000 merchant cash advance with a repayment schedule of 10% of your daily credit card sales. This means that each day, 10% will be deducted from your credit card sales until the loan is paid off.
The biggest advantage of an MCA is that it’s easier to qualify for than a traditional loan. This is because MCAs are not based on your credit score or collateral, but rather on your future sales. This makes them a great option for businesses with bad credit or little collateral.
What is an MCA Lender Buying?
When you take out an MCA, the lender is essentially buying a percentage of your future sales. This means that if your business does well, the lender will make more money.
The biggest risk for the lender is that your business may not do as well as expected, and you will be unable to make your repayments. In this case, the lender may lose money.
This is why it’s important to only take out an MCA if you are confident in your ability to repay the loan. Otherwise, you may end up damaging your business and harming your personal credit score.
What Are the Pros and Cons of An MCA?
There are both advantages and disadvantages to merchant cash advances. Below, we outline some of the pros and cons of this type of financing.
Pros
- Easy to qualify for
- Fast funding
- Flexible repayment terms
- No collateral required
Cons
- High interest rates
- Short repayment terms
- Can be difficult to obtain if you have bad credit
How To Qualify for a Merchant Cash Advance
To qualify for a merchant cash advance, you’ll need to have been in business for at least 6 months and have consistent monthly revenue of at least $5,000. You’ll also need to provide some basic information about your business, such as your tax ID number, business name, and address. Other possible requirements for an MCA include providing bank statements and merchant processing statements.
It’s important to note that merchant cash advances are not based on your credit score, but rather on your future sales. This means that even if you have bad credit, you may still be able to qualify for an MCA, though the provider would be more strict with the application process.
The common types of businesses that go for MCAs include restaurants, retail stores, hotels, and service-based businesses. These types of businesses usually have a high volume of credit card sales, which makes them good candidates for this type of financing.
What To Expect If You Are Approved
If you are approved for a merchant cash advance, you can expect to receive the funds in as little as five business days, depending on the provider. The repayment schedule will be based on a fixed daily or weekly amount that is automatically deducted from your credit card sales until the loan is paid off.
It’s important to note that merchant cash advances typically have high interest rates and short repayment terms. For this reason, it’s important to carefully consider whether an MCA is the right financing option for your business before applying.
If you think a merchant cash advance is right for your business, the next step is to find a lender. There are many lenders out there who offer MCAs, so it’s important to compare rates and terms before you choose one.
However, if you are looking for an easier alternative to merchant cash advances with friendlier terms, consider fixed rate business loans. LendThrive offers fixed rate loans for small businesses in amounts up to $150,000.
It takes only a few minutes to complete the online application, and you’ll get the funds you need in as fast as 24 hours. Our Rate Reduction Rewards program also incentivizes borrowers for consistently paying on time by lowering their interest rates down the line.
