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What You Need to Know About Merchant Cash Advances (MCA's)

Like a young plant needs sunshine, your new business needs cash flow to thrive. The challenge? Getting that cash flow can take a lot of work for many startups.

But there's good news! Merchant Cash Advances (MCAs) can be a helpful tool for small businesses like yours. An MCA is like a quick burst of water for your seedling, giving you the cash you need to overcome challenges and keep your business growing.

The best part? Getting an MCA is often easier than a traditional loan application.

Ready to learn more? Let's dive into the world of MCAs and see if they're right for your business!

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.

Payback/Factor Rates

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.

Ready to Explore Merchant Cash Advances? 

Due to the simplified application process, MCAs can be a tempting funding option for small businesses. However, comparing offers from reputable funders is crucial to secure the most favorable terms. Numerous online resources can help you navigate the MCA landscape and find the right fit for your business needs.

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.

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