Merchant Cash Advance- All You Need to Know

Merchant Cash Advance: A Quick Financing Option

Merchant cash advance is a secure financing option where the lenders provide funds in exchange for a portion of the merchant’s future sales. Traditionally, the cash advances made were remitted as a percentage of the credit/debit card sales of the merchants. But now, even if your business doesn’t depend on credit/debit card sales you can still apply for a merchant cash advance. 

Traditional Method vs. New Method

Remittance is drawn as a percentage of debit/credit card sales.  | Remittance is drawn as fixed payments on a weekly or monthly basis.
 |  Remittance is based on sales - higher the sales, the faster you can repay.  | Remittances do not fluctuate according to sales.

Advantages of Merchant Cash Advances

Merchant cash advances are a blessing to small businesses looking for a quick funding option to deal with their short-term financial requirements. They act as an alternative to traditional loans which have a long and tedious process of application. As opposed to the long waiting period of traditional loans, merchant cash advances are approved in as little as 24 hours, that too with minimal paperwork. Small businesses with very little or no assets can avail of cash advances without any collateral.

Advance Amount, Repayment Amount, Holdback, and Factor Rate

The advance amount is the amount that you receive from the lenders upon the approval of your application.

In the place of traditional interest rates, cash advance providers charge what is known as Factor Rate, from the merchants. The factor rate varies from 1 to 2 and is determined by the lenders after assessing the merchant’s business.

Repayment amount refers to the amount that the merchants pay back to the lenders. The total repayment amount is calculated by multiplying the advance amount with the factor rate.

For example, if the factor rate is 1.5 and the lent amount is $10,000, the total amount to be repaid will be $10,000 x 1.5 = $15,000.

Holdback refers to the amount remitted on a daily/weekly/monthly basis from the merchant’s account until the total amount is repaid.

Merchant Cash Advance is Ideal for You if:

- You do not have assets to provide as collateral

- You have a low credit score

- You need to raise capital immediately

- You have a good volume of credit/debit card transactions

- You own a seasonal business with fluctuating sales

Documents Required While Applying for MCA

- Driving License

- Bank Statement

- Credit Report

Steps Involved in the Process

1. Identify a reliable funding partner.

2. Apply for a cash advance with all the required documents.

3. After going through the documents and assessing your sales, the lenders decide the terms and conditions and provide you with the advance amount.

4. Depending on the previously agreed upon factor rate, the final repayment amount is paid back to the lender on a daily/weekly/monthly basis.

Even though the basic processes are the same, there might be slight differences depending on the service providers.

Managing Merchant Cash Advances Digitally

With digitalization, the entire process of providing and receiving funds has become extremely simple and transparent. It is possible to manage multiple investors and merchants easily with customized digital tools. Our feature-rich and intuitive tool will help you track, manage, and monitor all your transactions in a single location with ease.

The graphical representation below will help you understand the process of merchant cash advance which can be handled seamlessly using our software.

Roles in the MCA Process

One lender can take investments from multiple investors and assign them to either a single merchant or multiple merchants. The lender here acts as the admin who manages all the transactions from the investors, collects the repayment amount, and sends it back to them.

The merchants and the investors can log in to their accounts and view the transactions and generate reports on them. Apart from this, statements are sent to the lender, merchants, and investors on a regular basis.

The role of the ISO agent is to identify potential leads and convert them. The agent will receive a commission in return for the service. Here too digital tools can come to your aid. Our CRM software is the ideal tool that can help you streamline the entire process of tracking/managing potential leads to obtain the best results.

Pros and Cons of Merchant Cash Advances

Pros:

- Fast Approval: Merchant cash advances get approved within 24-48 hours.

- Poor credit score is overlooked: MCA providers give more importance to a business’s performance than the person’s credit score. Credit card sales records are checked to determine the business’s ability to pay back the amount.

- No collateral required: The advance amount is determined based on the company’s performance in sales. The lenders do not ask for any other collateral to provide cash advance.

- Lesser Documentation: The application process is much quicker and easier compared to traditional loans. It requires lesser documentation work to be done.

Cons:

- Higher interest than traditional bank loans: MCAs can be very expensive and if not managed efficiently can turn into a debt trap. Since MCAs don’t fall under the category of traditional bank loans, they are not subject to the usury laws that limit the interest rates.

- The payback period will be shorter than a traditional bank loan.

Merchant cash advances are a legitimate alternative to traditional bank loans. Businesses that have reasonably good sales can opt for it to deal with cash flow shortages, buy equipment, for renovation/repair, etc. But it is important that you understand the terms involved and make informed decisions. Don’t hesitate to ask your service providers for clarifications if you need any.