We can think of small businesses as young plants surrounded by hundreds of giant trees, jostling for precious sunlight and survival. In the world of commerce, cash represents this scarce sunlight, and its insufficiency is responsible for the death of many young businesses. However, small business owners who know about merchant cash advances (MCA) and how to use them effectively have a better shot at healthier growth.
Merchant cash advances ensure businesses, especially small ones, stay supplied with working capital steam. With MCA, you can get cash quickly to meet pressing challenges and keep the engines of your business running. Another exciting part is that you can get MCAs without running through the usual gauntlet of a business loan application. Interested? If you are, let's dig in and find out everything you need to know about MCAs.
What is a merchant cash advance?
A merchant cash advance- also called an MCA, is not a loan but an advance of cash based on your business's future revenues. You pay this advance with an automated withdrawal via ACH directly from your business banking account. The amount is set beforehand with a percentage of your daily bank balance (usually daily or weekly, but terms and qualifications can vary). Merchant cash advances are ideal for small businesses that require capital quickly to cover cash flow swings or short-term high-yield investments. When opportunity strikes, that's where revenue-based business advances like this one shine.
How does a merchant cash advance work?
Small businesses depend on constant and sufficient availability of cash to keep running. With this liquidity, the company can thrive in the sea of operating expenses and take advantage of opportunities due lack of investment capital. For example, your business may need more goods and supplies or pay for equipment repair, or a project requires some upfront spending.
After applying for an advance, the funder looks at the average worth of deposits to your business banking account that can be considered revenue. They can then decide how much advancement you should receive at a specific factor rate. Your advance should be in your business bank account between one and three days after starting the process. After that, you will repay your advance by releasing an agreed-upon percentage of your future sales.
Depending on your agreement with the funder, you could repay your advance daily and sometimes weekly. Also, it's refreshing to know that your payback will only take a specific amount based on the agreed-upon percentage, so you always know what to expect.
Merchant cash advance rates and fees
The calculations and charges surrounding MCA's may come across as straightforward initially, but that's the part that usually proves to be most tricky. Therefore, small business owners seeking to apply for cash advances should understand how the rates and fees work before diving. Let's see what charges are involved in an MCA.
Advance Amount (Principal)
The advance amount or principal is the money you receive from the MCA funder. The funder will assess your business and approve your amount upon your request. The higher the advance amount you request, the higher your fees will be and the longer you may be indebted to the funder.
The payback rate of an MCA is the percentage of advance that the business will pay back in addition to the actual worth of the advance. For example, if an advance of $10,000 has a factor of 45%, the business will pay back the advance amount plus the factor rate. That is $10,000 + $4,500 (45%), amounting to $14,500 in total payback.
Another way of referring to the cost of capital is the "factor rate," which is essentially the same as the payback rate. You can find out the total payback amount for an MCA by multiplying the factor rate by the principal. Using our previous example, a principal of $10,000 multiplied by a factor rate of 1.45 will give a payback amount of $14,500. Payback/factor rates vary from funder to funder.
How much can you get from a merchant cash advance?
Unlike traditional business loans, your MCA amount doesn't solely depend on your FICO score or any other credit score. Your regular cash inflow is the primary factor for determining your MCA amount. Therefore, your chances of higher advances increase with your business's revenue. Regardless of your revenue, it's usually best to take only advance amounts your business can use and yield income from. Otherwise, you are just carrying debt that needs to be offset by an investment's success or the coverage initially required. It's in the interest of both you and the funder to make something of the capital. They WANT to invest more in your business.
Businesses can typically get up to $1 million in revenue-based advances, but the funders we work with do anywhere from $5,000 to $500,000.
When to use a merchant cash advance
The best time to use a cash advance is when your business needs an urgent and crucial cash injection. For many companies, profit is seasonal, and a slow season can create a financial burden for the business. An MCA can help close the economic gaps and keep the business in good shape.
Your business will also need an MCA when there is an urgent profit-making strategy to fund or a deal to take advantage of. For example, there could be a discounted equipment sale offer your business may be interested in but need more financial muscle to participate in. Funders love this scenario! MCAs will also save the day by meeting unforeseen expenses and helping you avoid embarrassing situations.
What are requirements for merchant cash advance?
Applying for an MCA is typically easier than applying for a traditional business loan (and faster!). But that's if you get the most favorable deals from a small business-friendly funder, and that is what we do here at One Park Financial. If you start the process now, you can get prequalified within minutes. All you need to do is answer a few quick questions. Within a few minutes, you can have your questions answered by your business funding specialist and get the fast financing your business needs—no voluminous paperwork. What we are about is the performance of your business!
You only need to have been in business for more than 90 days and earn at least $7,500 in monthly sales. Don't delay, and get started today! A perfect opportunity to bail your business out of a financial fix is correct before you!
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.