Opportunity doesn’t wait – and neither do your accounts payable. Sometimes you need a fast infusion of funding to scale up or meet your obligations and merchant cash advances (MCAs) are one of the quickest ways to make that happen. After you accept an offer, the funds will typically be deposited in your bank account within three business days.
Why so fast? Because an MCA isn’t a loan; it is an advance against a business’s expected future income.
Approval for this type of funding is based on your how much money your business is taking in on average. Since your credit score isn’t at issue here, the application process moves quickly, and qualification requirements aren’t as complex as for traditional bank loans. A business owner doesn’t have to have a great credit history or present complex documentation to be approved for an MCA. No need for collateral to secure the funding either .
You don’t need to be a merchant to get a merchant cash advance – if you have a business bank account, you’re eligible.
How do merchant cash advances work?
With an MCA, you are getting an advance on a portion of your anticipated revenues. So rather than focusing on credit history, an MCA provider primarily looks at a business’ daily revenues over a period of time to determine whether a business qualifies for funding – and if so, how much.
Soon after you’re approved and accept an offer, a funding company deposits a lump sum amount in your business account. This sum is an advance on your future revenues. It’s repaid through automatic deductions of a set percentage of your receipts, with are withdrawn from your business account.
For example, if the set percentage is 10%, and the day’s revenues total $500, then the repayment amount for that day is $50. On another day, when revenues are $1,500, the repayment amount would be $150. Funds are automatically withdrawn until the advance and any fees are paid back.
Since you are paying back a set percentage of the day’s actual receipts, not your projected revenue, payment amounts will always align with your business cash flow. You’ll pay less during slow periods, and you’ll catch up by paying more during high-volume times. Traditional loans with fixed payment rates may be difficult to pay during slower business cycles.
What do I need to know about applying?
It can be hard to understand an MCA contact, even for those who are familiar with standard financing terminology. Understanding how the loan is paid back, what the percentage of sales amounts to in real money, factor rates and the total amount that is actually owed (receipts purchased amount) is critical.
For example, instead of the annual percentage rates that credit cards and bank loans use, MCAs use “factor rates” – usually between 1.1 to 1.5 - to represent the total amount that will be repaid to the advance provider.
You can figure out how much it will cost to repay an MCA by multiplying the advance amount by the factor rate. As an example, an advance of $25,000 with a 1.3 factor rate would have a total repayment amount of $32,000. There may be additional fees, such as a processing or set-up fee, so check the terms of your MCA carefully. Look also for the “retrieval rate.” That’s the percentage of your sales (or income) that will be withdrawn to pay back the advance. Average retrieval rates are between 5-15%.
For help in crunching the numbers and understanding your MCA and other small business funding options, you can turn to One Park Financial’s funding experts. One Park Financial works with a network of funding sources, and the company’s small business experts will help guide you through the funding process. Visit oneparkfinancial.com or call 855.218.8819 for more information.