Complete Guide to Applying for Merchant Cash Advance for Small Businesses

How to Apply for Merchant Cash Advance for Small Business

It can be challenging for small-business owners to access quick capital to finance their business or deal with emergencies. That is because many traditional funding options have long processing times, complicated paperwork, and high credit score requirements.

However, you don’t have to go through that with newer funding options. Merchant Cash Advance (MCA) is an example of such funding options.

So, what is Merchant Cash Advance and how does it work?

Not to worry, this article will explain Merchant Cash Advance, the repayment structure, pros, and cons. Finally, we will recommend the best Merchant Cash Advance providers for small businesses in the USA and Canada.

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is simply a ‘cash advance’ from an MCA lender. While this might seem like a loan, it is not technically a loan. It is a sum of money given to a small business owner in exchange for a percentage of future sales.

It is an alternative way to finance small businesses and deal with financial emergencies. Business owners can access the cash advance without going through the time-consuming and rigorous application process of traditional small business loans.

It is an excellent option for new small businesses that need urgent cash to get through in the short term. In some cases, it is the only option available to entrepreneurs who are working hard to recover from a bad credit score.

Difference Between an MCA And a Traditional Business Loan

There are major differences between an MCA and a traditional business loan.

  1. Application process: The process of getting an MCA is straightforward. The MCA lender examines your credit card records and gives you a contract based on your need and the interest rates. For a traditional business loan, the business owner must apply, comply with a rigorous screening process, and put up collateral in most cases.
  2. Repayment plan flexibility: Traditional loans require you to make fixed monthly payments over a specified period. MCAs allow you to earn daily or weekly payments until the payback amount is paid in full.
  3. Speed: While a traditional business loan can take weeks to be approved, you can access a merchant cash advance within days.

Terms In an MCA Contract

You can get an MCA in record time, but it does come with its terms and conditions. Before you get the funds, you will need to sign a contract. You must understand the stipulated terms in the agreement before you append your signature. Here are the most essential terms to help you make sense of an MCA contract.

  1. Advance Amount: This is the amount the lender is willing to give you as a merchant cash advance. It is essential that you request only what you need so you don’t have to pay back more than necessary. The agreed-upon amount can be greater than, equal to, or less than your monthly sales. It all boils down to your financial need and the repayment period you are comfortable with.
  2. Payback Amount: This is the total amount you will repay to the MCA lender. Every MCA lender charges a fee (also called a factor). This fee is added to the advance amount, and the total is the payback amount.
  3. Holdback: This is the amount you must withhold from your credit card transactions daily. Before you sign the contract, you should examine your sales record to see if your business can do without the withheld amount.

How Merchant Cash Advances Work

Merchant cash advance started out as an alternative capital source for businesses selling through credit and debit card transactions such as retail outlets and restaurants. Today, even businesses whose primary revenue does not come from credit and debit card sales can access merchant cash advances.

Businesses that rely on debit and credit card sales share a percentage of their sales with the lender. Other companies repay their cash advance by fixed weekly or daily debits from their bank accounts withdrawals.

How much you repay depends on the amount you applied for and the fees attached to your cash advance. The fees are determined by your sales receipt. The lender used a factor rate – usually between 1.2 to 1.5 – to determine the risk involved. A higher risk of default means a higher factor rate. A higher factor rate means higher fees. Multiply the factor rate by the cash advance to get the total repayment amount.

Possible Ways of Structuring an MCA Repayment Plan

MCA repayment plans can be structured in two major ways:

Per-cent of credit card sales

Under this arrangement, the lender withdraws a percentage of your card sales until the payment amount has been paid in full. This arrangement usually lasts between three to 24 months. A higher credit card sales will help you repay the advance within record time.

For instance, you need $25,000 to purchase new tables and chairs for your restaurant. You apply and get a cash advance of $25,000. The provider assigns a factor rate of 1.4 in the contract based on its risk assessment, so you owe $35,000.

Suppose the merchant cash advance provider deducts 10% of your monthly credit card sales until you’ve repaid the $35,000. And your restaurant records a monthly average of $100,000 in credit card sales per month. In that case, you’d repay $10,000 every month or $333 every day in a 20-day month. You would pay off the amount by the fourth month at this rate. If your sales drop to $50,000 monthly, it will take you seven months to repay the amount.

Because your sales can fluctuate monthly, the payback period can be shorter or longer than you expected.

Fixed daily or weekly withdrawals

Under this arrangement, the lender withdraws an agreed-upon amount from your sales on a weekly or daily basis. The withdrawn amount will be based on an estimate of your monthly sales.

Unlike the Per-cent credit card sales repayment plan, your repayment amount remains the same regardless of your sales record.

Why Business Owners Apply For MCAS

Business owners apply for MCAs due to their many benefits. Here are three for your consideration.

  1. Quick access to funding: You can get a cash advance within days without complicated paperwork. Simply submit your daily credit card sales receipts so the provider can determine if you can repay the amount you are applying for.
  2. Zero physical collateral: You don’t need to take a mortgage or put up your physical store as collateral. In some cases, you might supply business assets or make a personal guarantee. Still, it is less stressful than securing physical collateral.
  3. Flexible payment options. You can choose to repay based on a percentage of your monthly sales. This is the preferred option for many businesses that record on and off-seasons.

What Are the Pros and Cons of an MCA?

We will not sugarcoat it: an MCA comes with its share of pros and cons. However, experience has shown that the pros outweigh the cons for small businesses that need urgent cash.

Pros

Cons

Should you apply for an MCA?

Having discussed the benefits, pros, and cons, the big question is, ‘should you apply for an MCA?’ Your financial adviser is in a great position to answer that question, but here are some things to consider.

If you have a bad credit score or need urgent funding, an MCA might be your only option. This also applies if you can’t put up sufficient collateral to access a loan from a traditional banking institution. However, businesses that have shut down operations should ensure they can resume on time and record good sales before applying for an MCA.

Which merchant cash advance provider should you partner with?

There are many affordable merchant cash advance providers to choose from. We have reviewed so many of them, and our top pick remains the same.

We base our selection on the factors that matter most to the growth of small businesses:

Our top pick is United Funding Group, and here is why….

United Funding Group: A mini-review

United Funding Group provides the most accessible funding for small businesses. Whether you own a newly established business or looking to scale operations, United Funding Group can provide the much-needed financing. They offer a large variety of financing options to choose from based on your business needs and preferences.

Unlike many other merchant cash advance providers, there are no hidden fees with United Funding Group. What you see is what you get. The application process is fast, easy, transparent, and stress-free.

Conclusion

An MCA might be the only thing saving your business from collapse or temporal paralysis. However, it only works right if the contract terms are favorable to your company and you partner with the right provider.

If you want to unlock the benefits of a merchant cash advance without dealing with shady providers, apply to United Funding Group for your subsequent financing.