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When you need to raise capital for your small business quickly, a merchant cash advance (MCA) can be a convenient option. However, it’s important to understand both the pros and cons of MCAs before you decide to apply for one. A merchant cash advance is a type of financing that provides a lump sum in exchange for a percentage of your future credit card sales. This can be an appealing choice for small business owners because the application process is straightforward and funding can be obtained quickly. However, it’s significant to note that MCAs often come with high fees and may not be suitable for businesses with low credit card sales or unstable income.

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How To Qualify For A Merchant Cash Advance

To qualify for a merchant cash advance, a business will generally need to have been in operation for at least six months and have a minimum amount of monthly credit card sales. The amount that can be borrowed is based on the business’s average credit card sales over the previous three to six months and can range from 50% to 250% of those transactions. Repayment of the advance is typically made through a daily or weekly percentage of the business’s debit and credit card sales, known as the “holdback” or retrieval rate. This rate can be anywhere from 5% to 20% and is based on the size of the advance, the business’s credit card sales, and the repayment period.

Benefits Of A Merchant Cash Advance

One of the main benefits of using a merchant cash advance is the potential for fast approval and funding. If you need money immediately to cover expenses like payroll or unexpected business costs, an MCA may be a good option. Additionally, merchants cash advance providers are often more lenient when it comes to credit requirements, focusing more on the consistency of the business’s credit card sales and length of time in operation rather than on credit scores or other debt. However, it’s important to note that most merchant cash advance providers do not report to credit bureaus, so an MCA may not help you build credit.

Another advantage of a merchant cash advance is that they do not require collateral. This means that you don’t have to put any personal or business assets on the line in order to obtain financing. However, it’s essential to be aware that the cost of a merchant cash advance can be higher than alternative types of financing, such as a small business loan or a line of credit. In addition, the repayment terms for a merchant cash advance may be less flexible than those of traditional bank loans, as payments are based on a flat percentage of credit card sales rather than a fixed monthly amount.

Pros And Cons Of A Merchant Cash Advance

If you’re considering a merchant cash advance for your small business, it’s important to carefully weigh the pros and cons and consider all of your options. While an MCA may be a convenient source of funding in a pinch, there may be other, more cost-effective ways to get the financing you need. Business lines of credit, small business loans, and crowdfunding are all potential alternatives to consider. It’s also influential to have a clear understanding of the factor rate and overall cost of the merchant cash advance before making a decision. By carefully evaluating your options and understanding the terms of the financing, you can make an informed choice that’s best for your business’s needs and cash flow.

Who Should Consider a Merchant Cash Advance?

Based on the advantages, merchant cash advances suits businesses that need fast access to cash and have an established credit card transaction history. Retailers or restaurants, for example, would be appropriate candidates. A cash advance is a good fit for newer businesses with sufficient credit card sales but has not operated long enough to build a solid credit history.

Why Business Owners Should Be Wary

The benefits of using a merchant cash advance instead of a term loan are numerous, but one specific drawback can outweigh them all. The costs involved can easily outstrip anything you gain in terms of convenience or accessibility.

How Rate Influences Cost

A merchant cash advance isn’t assigned an annual percentage rate, unlike a loan. Instead, business owners pay as a factor rate. The factor rate is a decimal point and represents the amount you agree to repay to the advance provider. This fee varies, but it’s normally between 1.1 and 1.5.

The factor rate is one of the most misunderstood aspects of merchant cash advances because it makes the interest rate appear lower than it is. When you take time to run the numbers, however, it becomes apparent that merchant advances can be one of the most expensive borrowing options.

Here’s an example to illustrate this point. Assume that you’re taking an advance of $50,000, with a factor rate of 1.3, and a 12-month term. When you multiply the factor rate by the advance amount, you see that the total repayment amount comes to $65,000. At first glance, it looks like you’re paying an interest rate of 30%, but the actual APR may be much higher, based on the holdback amount.

Example Of Rate Breakdown

Let’s say you agree to a retrieval rate of 15% of your daily receipts, and you’re projecting monthly credit card sales to average $35,000 over the next year. Using those figures, your daily payment would come to $175, and the loan would be repaid in approximately 372 days. That would put the daily interest rate at 0.15% and the overall APR at 53.9%, nearly double the 30% rate you initially assumed you were paying. If your business generates $40,000 in monthly credit card sales, the APR will climb to 61.6%.

When you consider a merchant cash advance in that light, it begins to lose some of its luster. If you’re still thinking of pursuing an advance, negotiating a lower holdback percentage can help to minimize the cost. Paying a smaller amount daily may mean it takes longer to satisfy the debt, but it also lowers the APR in the process.

Alternatives to a Merchant Cash Advance

If you’re not as pressed for time to raise capital, you’re leery of the higher costs that merchant cash advances entail. Some other possibilities are worth exploring.

  • Term loan – 

    A term loan is similar to a mortgage or car loan; you borrow a set amount, repaid over a fixed amount of time. Rates can be fixed or variable, and term loans may be secured or unsecured. The APR on a term loan would be more favorable than a credit card or a merchant cash advance. Your repayment term may last from 12 months to 10 years, depending on what you borrow. The larger the loan, the more likely you are to need collateral. Before applying for a term loan, read our four-step checklist to prepare.

  • Business credit card – 

    A business credit card is a useful way to cover expenses while earning valuable rewards, such as points, travel miles, or cashback. Interest rates are often in the neighborhood of 10% to 20%, although some cards come with a 0% promotional APR for a set period. Approval for business credit cards is normally on your personal credit history, and while no collateral is necessary, you have to agree on a personal guarantee.

  • A business line of credit – 

    Drawing on a business line of credit can be preferable to a credit card or merchant cash advance. You receive the money in a lump sum and then repay it weekly or monthly. Many banks extend business lines of credit up to $100,000 without requiring collateral. The interest rates are usually lower than a traditional loan, but the rate is variable, meaning it can fluctuate over time in conjunction with changes in the prime rate.

What Is A Merchant Cash Advance

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BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.

You can reach a loan specialist toll-free at 1-800-824-2407 or email [email protected] or apply online here, and we can guide you on which loan is the best fit for your business.


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