If your business needs an instant influx of cash, a merchant cash advance could be the right solution for you. This financing alternative is one of the easiest ways for small business owners to receive working capital. You don’t need collateral and bad credit will not automatically disqualify you from getting funding.
A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future receivables. With this option, instead of making one fixed payment over a set repayment period, you make daily or weekly payments plus fees until the advance is paid in full. Unlike with traditional bank loans, the requirements aren’t strict and the approval process is shorter than it is with any other business loan out there.
Here, the risk factor is calculated differently by lenders. Rather than showing a profitable business or having a top-notch credit score, the terms and the amount you qualify for are based on your monthly revenue. For example, a business owner with an 800-credit score will not get approved if his business makes less than $4,000 in average monthly sales. On the other hand, having a low credit will not hurt your chances of getting approved if your business is generating a large sales volume. With that being said, the rates are higher than business term loans, so calculating your ROI to employ this kind of financing is essential.
With a merchant cash advance, there are two different repayment methods.
The first option involves the lender deducting their portion directly from the business checking account weekly or daily. The second option to repay the advance is through your credit card sales. With this, the lender deducting their payments via a split of an agreed-upon percentage of credit card sales. However, this option is available only if most of your revenue comes from the POS system.
Example for Merchant Cash Advance
Suppose that you are looking to capitalize on a new investment. To take advantage of this cost opportunity, you turn to one of the MCA’s providers. You borrow $30,000 for a payback amount of $37,200 (fixed amount). Which means the factor rate is 24% for the whole repayment period. Then, you repay the advance via ACH (weekly or daily) or as a specified percentage from credit card sales. Therefore, with an ACH payment, the repayment schedule is fixed. For example, if you received a term for 6 months, you will pay $1,550 weekly or $310 daily.
Whether you need to meet a short-term capital need, or you prefer keeping cash in your pipeline for other expenses, this type of financing can be the right fit. Most often, merchant cash advances are used by small businesses that are not qualified for traditional loans.
There are several types of financing alternatives when it comes to commercial lending. For the most part, this one is the easiest to qualify. Also, with a merchant cash advance, payments aren’t fixed. Therefore, the repayment amount is adjustable in case of a slow sales period. Moreover, the amount of paperwork you need to submit when applying for a cash advance is much smaller than for any other business loan.
The requirements are relatively more straightforward than for other business loans. Business owners with no collateral or a bad credit score can benefit from this option. However, other elements can impact the pre-qualification process, such as more than 10 insufficient funds a month, being less than 6 months in business or a recent bankruptcy.
The Best Industries for Merchant Cash Advance
Merchant cash advance is a working capital solution that provides your business with a sum of cash in exchange for a portion of future receivables.
Invoice factoring designed to provide you with instant access to fast cash in exchange for invoices. That cash can be used for a marketing campaign or any other urgent need.
An equipment loan can help you acquire physical assets for your business with a low down payment. This alternative fits businesses that are looking to upgrade their equipment.
A business term loan provides you a sum of capital that you pay back with fixed, equal monthly payments over a set repayment period.
SBA loans are partially guaranteed by the U.S. Small Business Administration and provided by traditional banks, online lenders and credit unions.