A merchant cash advance is a form of financing that allows you to use your current sales volume to borrow money from a lender. Unlike traditional loans with defined term lengths, this gives you access to funds on an as-needed basis. A merchant cash advance is a type of business funding provided by a capital provider. This type of cash advance allows you to borrow money against your future receivables and is ideal for small businesses that use credit card processing.
Wisco Capital allows businesses to get approved for advances over and over. This means you can get a small cash advance now to pay your employees, and multiple advances in the future to fund projects, inventory, invoices and more.
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Date Updated: 2022-03-17T09:00:00-07:00
Merchant cash advances are popular for starting or growing your business. The truth is, many businesses today are low on cash. In fact, about 80% of businesses rely on some form of credit.
If your business does not qualify for a traditional loan due to a short business history or low business credit score, a Merchant Cash Advance (MCA) might be the right solution for you. We’ll go over how they work, repayment structures, pros and cons, and your best options to help move your business forward.
Note : To qualify for a merchant cash advance, your business must be generating at least $10,000 per month in sales. If your business does not yet generate sales, an MCA will not be available to you.
Merchant service providers collect their advances through a percentage of your business's sales or receivables, also known as a holdback. This typically means there are no set repayment dates, as your payments come out of each transaction and depend on the cash flow of your business. However, most cash advance providers expect repayment within 18 months. Your future revenue is securitizing your advance. If you're in need of funding quickly and know you'll be making sales to repay the advance in the future, a merchant cash advance is a great option.
When it comes to merchant cash advances, a holdback is the actual dollar amount of daily sales your lender applies to your advance. This dollar amount is a percentage you agree upon when you set your initial terms. This means the more sales you collect, the faster you will repay your advance.
Holdbacks are the actual dollar figures/sums of money taken out of your sales that are used to repay your advance. An interest rate, on the other hand, is the agreed upon cost of your borrowed capital, calculated as a percentage.
Although these are the most common reasons a business owner might choose to get a merchant cash advance, there are numerous other factors.
A merchant cash advance is issued when your sales volume is $10,000 or higher, and you have at least 6 months of consistent sales history.
These advances can be awarded to businesses with merchant accounts, though a merchant account is not required to receive an MCA. It is more common for businesses to pay back their MCA through daily or weekly ACH deposits. Most merchant service providers should be able to integrate with your lender.
Note : Revenue and average daily balances, along with any outstanding business debt will also factor into the qualification process.
In the event you default on a merchant cash advance, your lender can go after your bank account, impose judgements on your other merchant account funds, or even seize your additional assets. Although this may sound scary, cash advance lenders are not as black and white as big institutional banks.
That means they are willing to work with you to come up with payment plans that are more affordable (lower interest rates, extended terms). Since they have the autonomy to make these decisions it's prudent to maintain constant communication with your lender should you find yourself in a situation where repayment becomes difficult. That is why it is important to keep close tabs on all cash advances and make sure you have enough financial resources and a solid repayment plan.
Note : Depending on your financial situation, some MCA lenders will also require a personal guarantee for a merchant cash advance.
Unlike traditional business loans, merchant cash advances do not have a set term length. While this may depend on your lender, typically these cash advances are based on revenue. Therefore, setting established payments and end dates is not feasible. In fact, the whole process depends upon the number of sales your business processes, i.e. every transaction that goes through your credit card processor.
To calculate your cash advance fee , multiply the “factor rate” (also known as a “buy rate”) by the agreed-upon amount borrowed. Fee rates vary depending on providers and agreements.There may be additional fees such as processing and closing fees. As previously stated, loans are usually repaid in fixed installments, while merchant cash advances are repaid with a percentage of your daily credit and debit card sales. In fact, these fees are not that different from the credit card processing fees you're used to.
Two of the most important factors pertaining to merchant cash advances are your revenue and average daily balance. Just like other types of loans, providers base their approval terms on risk. Essentially the lower the likelihood of repayments, the higher the associated risk and in turn the higher the factor rate.
Other factors include, but are not limited to:
It comes as no surprise that MCA providers charge higher rates for merchant cash advances compared to traditional loans since they offer flexible repayment terms, lenient qualifications, faster approvals, shorter repayment periods, and much less documentation.
Repayments automatically come out of your merchant account as they are debited from each transaction. This happens daily or weekly, depending upon the agreement with your lender. Your provider may have a repayment structure already in place, but there could be room to negotiate. Although repayment structures vary between lenders, below are the most popular:
Split payments processing is the easiest repayment structure because it automatically deducts from your credit card sales. Every time your business makes a sale, you and your lender receive a portion of the profits. This simplifies your cash flow projections as you eliminate the hassle of watching your business gain and lose a percentage of profits throughout the day.
Automated Clearing House (ACH) withdrawals are the most common way to repay a merchant cash advance. They consist of automatic withdrawals from your merchant account to your cash advance provider. They may be fixed or variable depending on your agreement. However, if you are experiencing a decline in revenue, your lender may be willing to alter your payments. However, for your protection, this should be determined before entering into a merchant cash advance with a fixed ACH payment.
Apply now for a merchant cash advance and receive funds as soon as tomorrow.
Merchant cash advances can help you if your business needs a quick injection of capital. They are often approved within 24 hours and don't always require collateral, although they do require 6 months of sales history.
For many, merchant cash advances are a viable solution to their business funding problems. Here are just a few of the positives when considering an MCA:
It's important to analyze every aspect of your MCA and merchant account agreement to make sure you are paying a fair and reasonable rate.
Note: Some MCA providers may require you to use certain payment processors, regardless of any current business contracts or personal preferences you may have.
Despite all of the positives listed above, merchant cash advances do have some drawbacks. Here are a few of the cons that come with this type of business funding:
The merchant cash advance industry consists of businesses that provide credit to a merchant based on the merchant’s daily credit card sales and is not heavily regulated in comparison to the lending industry.
Since these advances are not legally considered loans, lenders are not subject to the same federal regulatory oversight that banks (usury laws that govern loans) and other lenders must comply with. This is a technicality that allows some lenders to charge high interest rates and escape the usury laws of their particular state.
Here are a few financing alternatives to merchant cash advances:
It's important to do your due diligence on the lender of your choosing. Read reviews, see a sample contract and make sure you ask as many questions as you need to feel comfortable with your lender.
To apply for a merchant cash advance, you only need to fill out a short application and provide 3-6 months of business bank statements (personal bank statements are not accepted. Sole proprietors must provide business bank statements).
Upon approval, in order to receive funding, you will need to provide a valid driver's license, voided company check, and Proof of Ownership (articles of incorporation or IRS form SS-4).
For advances $75k - $150k, provide the above information plus:
For advances over $150k, provide the above information plus:
A cash advance may sound similar to a traditional business loan, but there are fundamental differences between the two. Unlike a loan, a merchant cash advance purchases future receivables. Repayment can be in the form of split payments, or daily/weekly ACH withdrawals. Additionally, MCAs do not require a specific credit score to quality, and do not need collateral. On the other hand, a typical loan has fixed monthly payments, more stringent qualifications, and often requires collateral.
Additionally, the government heavily regulates the business loan space , while merchant cash advances operate outside this sphere. Some states are implementing regulations on these types of sales agreements. However, as a borrower, you should not expect the same protections as you would with a traditional loan.
In short, yes a startup can get a business cash advance. As long as you have been in business for at least 6 months and are processing at least $10,000 per month in sales consistently, then you meet the minimum qualifications. This also means that you need to have a business checking account, ID, and bank statements.
Any business owner that is a US citizen and operates their business in the US is eligible. You must be in business for a minimum of six months and gross at least $10,000 per month in sales. All business entity types are eligible, including sole proprietors, LLCs, S-Corps etc.
Yes, you can get a merchant cash advance with bad credit as long as the other factors are strong. Credit score isn’t the defining factor for approval, in fact this is what makes MCAs appealing. The eligibility requirements are much less stringent than that of traditional business loans from a bank or local credit union.
A major benefit of a merchant cash advance is the speed at which you receive funding, since they are typically approved within 24 hours as opposed to traditional banks which could easily take over a month. Additionally, merchant cash advances require minimal paperwork and often no collateral is required.
Another significant benefit includes the repayment process. These payments come directly from your profits (i.e. in instances where your lender sets up split funding with your merchant account, holdbacks are deducted at the transaction level). The MCA repayment process, in conjunction with a fixed factor rate, makes cash flow projection simple as you always know the entirety of what you owe.
Generally, merchant cash advance lenders are willing to offer flexibility in their repayment plans. These lenders may negotiate affordable payments by lowering the rate, extending the payment term, or, if necessary, offering a forbearance period.
Note : For assistance with repayment, communicate with your lender.
If you default on your merchant cash advance, the lender attempts to recoup their funds by going after your bank account and even seizing additional assets. Avoid this unfortunate situation by communicating financial difficulties with your lender.
If you need hassle-free business funding in a flash, a merchant cash advance is your answer. Thanks to the repayment structure, easy application, and established connection with your merchant services provider, an MCA is a great tool for new and existing businesses to flourish.
However, merchant cash advances may not be the best choice for every business. If you deal mostly in cash, need immediate funding, want your revenue flow to remain uninterrupted, and want an exact end date for your agreement, you may need to look into other financing options. Short-term loans, invoice factoring, and traditional installment loans may be better for your personal needs and business practices.
Merchant cash advances are a good source of immediate capital for your business. If you are a business owner looking for quick funding, a merchant cash advance could be the most suitable option for you. To determine if this type of financing is right for your business, fill out a quote form and get started today.
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