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How to Get Merchant Cash Advance

A merchant cash advance comes from a lender and is different from a traditional bank loan. A lender who offers a merchant cash advance will look at your credit card receipts and assess how much you need and how much you could pay them back. The contract you sign with the MCA lender will outline the amount you’re getting and how much interest you’ll have to pay back. Interest rates can vary widely between companies. The state your business is based in also plays a factor in how much you ultimately have to pay, as some states place limits on interest rates.

What Is an MCA Lender Buying?

Merchant Cash Advance | Fast Funding | Sunwise Capital

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In basic terms, the MCA lender is buying your future sales transactions. You have a contract with them and MCA lenders will assess your sales to see if you’re eligible for them to lend you the money, but the importance of an MCA is that it gives you an infusion of cash quickly.

If you have some water damage that you want to fix in your coffee shop, but don’t have the funds to divert to the repair, an MCA could be an effective way to quickly raise funding for those unexpected repairs.

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merchant cash advance is a type of business financing particularly well suited to a small business that accepts debit and credit card payments from customers.

The lender provides the company with a cash advance which it repays as a percentage of its customers’ card payments using a card terminal.

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A merchant cash advance, also called an MCA, provides alternative financing to a traditional small-business loan. With an MCA, a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
Merchant cash advances are best for small businesses that need capital immediately to cover cash-flow shortages or short-term expenses. But this type of financing can carry annual percentage rates in the triple digits and create a difficult cycle of debt. Generally, you should consider all other small-business loan options before an MCA.
Here’s what to know about merchant cash advances, how they work and what to keep in mind before choosing one for your business.
A merchant cash advance is not a business loan but should be considered a cash advance based on the volume of your credit card receipts. The funding provider gets paid back by taking a portion of your future credit card sales each day. You can usually get approved in a day or two—with very little paperwork. But you’ll likely pay for this convenience in higher interest rates. Because this option is more expensive than some other options, it’s a good way to take advantage of a short-term opportunity that requires fast cash, but it can become very expensive if you’re looking for money to bail you out of a financial bind. You don’t want to get in the habit of relying on merchant cash advances since its higher cost can make it very difficult to manage future cash flow.

How do merchant cash advances work?

business owner can access cash as soon as a merchant cash advance company approves the business for a fixed amount. This amount is then repaid with fees, using a percentage of future revenue.

Merchant cash advance repayments can be structured in two ways: as a percentage of card sales or as fixed withdrawals from a bank account.

1. Percentage of debit / credit card sales

This is the traditional way of structuring an MCA. A merchant cash advance provider deducts a daily (or weekly) percentage —typically around 10%— of debit and credit card sales until the amount is repaid in full.

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In contrast to other business loansmerchant cash advances don’t have typical repayment terms. This is because the repayment timeline is based on sales. Repayment terms can take anywhere from three to 18 months. The higher your credit card sales, the faster you’ll repay the advance.

2. Fixed withdrawals from a bank account

An alternative method of repaying your merchant cash advance is to withdraw funds directly from your business bank account. This approach means fixed repayments are made daily or weekly from your account, which is not dependent on sales. The fixed repayment amount is based on an estimate of monthly revenue.

This type of repayment structure allows you to calculate precisely how long it will take you to pay the advance back based on the amount borrowed and can be better suited to businesses that don’t rely heavily on debit and credit card sales.

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Merchant cash advance rates and fees

How to start a business with a cash advance | Funding Options

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Instead of a traditional interest rate, merchant cash advance companies charge their fees as a factor rate. Factor rates typically range from 1.1 to 1.5, varying based on the provider’s assessment of your business.
The factor rate you’ll receive will likely depend on your:
  • Industry.
  • Years in operation.
  • Business financials.
  • Debit and credit card transactions.
  • Personal credit score.
Businesses whose ability to repay looks riskier will likely receive higher factor rates — and pay higher fees as a result.
The factor rate also does not include any additional fees the merchant cash advance company may charge you for working with it, such as administrative fees or underwriting fees, which will increase the total cost of your financing.

Flexibility – Your business only pays back the loan when it receives customer card payments, meaning that repayments are linked to sales, so you can better manage cash flow.

Access – Depending on the lender and application process, you can get approved for a merchant cash advance within 24 hours.

Unsecured – Merchant cash advances are a type of unsecured business finance. You don’t need to put forward collateral, making it less risky than traditional financing.

Application process – When applying for a conventional loan, traditional lenders may require a business plan, but merchant cash advance lenders will not.

A provider will instead look at your sales history. The lender may be able to access your merchant account statements online, which saves you from having to submit them via email or post, saving you time.

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Credit ratings – Because funding is secured by the lender gaining visibility into your sales, credit ratings are not usually taken into account.

Risk – Repayments are automatically taken from the money you receive from customer card payments. There is less risk of defaulting on your loan and incurring late payment fees.

Transparency – The amount you pay back doesn’t change. The lender will tell you what the total cost is at the outset.

Needing fast cash is an unfortunate problem for a lot of small businesses. Before signing up for a merchant cash advance with a lender, going over the pros and cons will give you a better idea of what you’re in for.

Pros

The biggest benefit of an MCA is quickly getting the money in hand that you need for your business. If you have a project or an improvement that you want to make in your small business and need money to make it happen, a merchant cash advance can be a way to acquire the money needed to do so.

Unlike a loan, you don’t need to have collateral to back up the loan. You also don’t need to worry too much about your credit score. And although the lender will pull your credit score, MCAs tend to be more forgiving for businesses with mediocre or bad credit.

A lender will be able to give you more flexible payment options as well. If you’re going through a slow sales period, you could readjust the daily holdback of your transactions as well.

Cons

Since there is a factor added to the payback amount for a merchant cash advance, if you’re in a period of lower sales, the higher payback amount could do more overall harm than good. The extra cost of paying back the merchant cash advance could take away necessary profits.

Since MCAs aren’t regulated, the factor on top of the payback account tends to be higher than the interest of a traditional bank loan. This can create problems for your business later down the line if the amount you owe is more than you can afford to pay. The payback period will generally be shorter than a loan.

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