Cashflow is becoming an issue – 80% of the companies that maintain their operations do not expect their revenues to improve in the next three months, according to surveys conducted by FSB – this is where merchant cash advance can be a useful product for cashflow stabilisation.
A merchant cash advance is a form of finance where companies can receive funding in exchange for a percentage of their daily credit card income. It’s only available to companies who take the majority of their sales using a card terminal, as the advance amounts are based on card sales. An MCA provider will operate through your card terminal provider and offer you a lump sum advance based on your average monthly sales taken by card.
MCA
Merchant Cash Advance is a financial product designed especially for businesses. It consists of granting cash in advance based on sales paid by credit card. Likewise, businesses cover the financing through this same form of payment. In other words, it is a loan set against future income. Below, we will explain the characteristics, as well as positive and negative aspects of acquiring this financial alternative.
This type of financing facilitates access to significant amounts of capital in a short period of time, generally ranging from US£5,000 to US£1 million. Approval is made within 24 hours and delivery time is between two and five days. Usually, the loan repayment term varies between three and 12 months.
The requirements to qualify for a Merchant Cash Advance are simple. The most important is the record of sales paid with a credit card, most lenders request reports for the previous two years, as well as sales over 50 thousand dollars per year. Other requirements to access this financial product are –
- Tax identification number
- Questionnaire about your business
- Bank statements
- Proof of citizenship or lease agreements
Advantages
- Credit history is not a major factor in approval – In some financial institutions, they do not require the applicant to have a score higher than 660, as in other financing.
- Fast loan approval and delivery process – With card sales as collateral, the process is fast, simple and accessible.
- May be tax deductible – As with other loans, lender commissions or fees can be deducted as a business expense.
- No collateral required – The sales of the business itself serve as a guarantee.
Disadvantages
- You must make credit card payments – This financial product can only be used by companies that have made credit card payments for at least the last two years.
- Paid on a daily or weekly basis – Unlike commercial loans, this financing is paid directly from credit card sales, it is not a monthly fee that you can cover by other sources.
- Annual percentage rate averages can reach 400% – The factor rate is high and when paid in a shorter period, it can considerably increase its cost.
- Not subject to federal regulations – As they are not aligned with federal regulations like commercial loans, additional fees may apply on the amount requested.
- Late payments can generate extra fees – As with other financing, paying late generates additional charges, but since payments are made daily or weekly, the action time is shorter.
Seasonal Business Benefit
An MCA is a smart option for seasonal businesses, as they can repay their loan in proportion to the revenue coming in, offering a safety net for companies with fluctuating cash flow. Most providers only consider companies that take an average of £3,500 in card sales per month and have been operating for a minimum of 6 months. The lender will take payment every business day until the loan is paid off.
Summary
Merchant Cash Advance may be a good solution for your business but before applying for any financial product, companies should compare which one is the most convenient according to their business needs and, above all, take into account their payment capacity.
The impact of financing can be seen almost immediately, some of the areas where you can notice it is in sales, operational processes, infrastructure and brand acceptance. If you don’t take the right financial product all these positive aspects can turn into debts that are impossible to pay. Companies should take their time and consider all factors before deciding on financing.
