Businesses sometimes find themselves at a crossroads of needing to grow to meet increased demand and having a limited amount of available cash. The usual go to solution for this problem is going to a bank for a loan. But between the paperwork, credit score requirements and time-frames to process, a traditional loan is not always a viable option. So what’s a business to do? Three words: merchant cash advance.
A merchant cash advance (MCA) is a lump sum of capital that you receive from a finance agency. This ready cash can be used for daily operations, expansion or to cover unexpected expenses or purchase inventory. There are many misconceptions about MCAs. Here’s what you need to know before deciding it is the right option for you:
- It is not a loan. As the name implies, it is a cash advance against your future sales/revenue, until you pay off the agreed upon amount. The MCA provider will review your merchant or bank statements to determine if they can approve you loan amout request, the rates and amounts to be deducted daily or weekly, depending on your agreement.
- No collateral needed. Unlike a traditional bank loan where you must provide something of value, you can apply for an MCA with 3 months’ worth of bank statements for your business, 3 months of credit card processing statements, a valid ID, lease and landlord information and a copy of a voided check or bank letter. This is especially beneficial to a new or fledging company with little collateral to offer.
Understand the lingo. We know you’re excited to sign on the dotted line and receive your funds but take a few minutes to familiarize yourself with the terms and conditions of the offer from the MCA provider:
- Fixed Fee: May also be noted as a Buy Rate or Factor Rate. It identifies the total amount you will need to pay back. You may see it written as a decimal point (1.10) or a percentage (10%). This means that if you receive an advance of $1,000 at a factor rate of 1.10, the total amount you will need to repay is $1,100.
- Withholding Rate: This is the percentage of your total sales that will be taken daily to repay the advance. The amount paid will depend on your total sales for the day. For example, if your withholding rate is 25% and your total day sales are $500, the MCA provider will receive $125. Similarly, if your total day sales are $1,000, the withholding amount will be $250. The higher your sales, the more you will be able to pay back and the quicker you will pay off the advance.
- Term Length: This is the amount of time you will have to repay the advance. The length can vary from three (3) months to several years, depending on your agreement with the finance company.
Repayment Options. Depending on your MCA provider, you will have the following methods available to you for repayment:
- ACH Withholding or Withdrawal: This option requires the MCA provider to have access to your business checking account. They will receive notice of the day’s profits and will deduct their portion (withholding rate) from your profits via an ACH transaction.
- Lock Box Withholding. Your daily profits are deposited into a bank account controlled by the MCA provider. They deduct their portion form the day’s profits and send the remaining amount to your business account. This option provides the MCA provider with direct access to your money and delays your profits by at least one day.
- Split Withholding: This option usually involves having a card processor installed. The processor company acts as a middle man to process transactions, calculate the withholding amount and send payments to both the MCA provider and remaining profits to your business checking account. Ideally this is the best option all around.
Merchant Cash Advances have been around for some time. As with any contractual relationship you enter, you should do your due diligence to review your options and understand what will be required of you. Despite some misconceptions about their purpose and processes, MCAs have helped many cash-strapped businesses go from red to black and reach new levels.