Cash is the fuel that keeps the small businesses growing. Without access to business loans, even the most successful brands could experience a serious cash flow crisis.
Unfortunately, small businesses struggle to obtain business loans from traditional owners of capital, like banks, credit unions, and venture capitalists.
To keep business operations afloat, most entrepreneurs turn to alternative lenders to get cash quickly to salvage dire business situations.
Obtaining a Merchant Cash Advance is one of the quickest ways available to businesses that need to get their hands on quick money to cover bad cash flow. But like any other borrowing vehicle, MCAs have their own pros and cons.
This article exposes the myths and facts surrounding Merchant Cash Advances(MCA) so that you can make an informed decision before sinking into debt with this type of borrowing.
Let’s jump right in!
What is a merchant cash advance?
This is an alternative funding source available to businesses, especially those with poor credit history. A finance company advances the borrower a direct deposit to be repaid based on an agreed percentage of future credit card sales.
The lender deducts a certain percentage of each credit card sale you make daily, but you may be lucky to find a few who accept weekly or monthly payments. APRs are expressed in factor rates of 1.2 to 1.5 and can easily run into triple digits.
What makes MCAs attractive to entrepreneurs is that they offer cash quickly to businesses with poor credit without the need for collateral.
Merchant cash advance: Pros and cons
- Faster lending: An MCA lender offers you cash immediately or within a few days. Money will be in your account around 2-5 business days.
- No need for collateral: MCA companies don’t ask you for collateral. Thus, your business and personal assets stay safe.
- Loans for poor credit: MCAs are targeted at businesses with poor credit profiles. Lenders won’t mind your credit score as long as your daily sales can cover repayments.
- High APRs: Average annual percentage rates range between 40%-150% and may go up to 400%.
- Shorter repayment terms: Repayments terms are usually 3 to 12 months
- Requires a credit card processor account: You must have a credit card processor account with at least $50,000 annual credit sales.
- Two years of credit sales: Some lenders may require you to have long-standing credit sales history of 2 or more years.
- Hidden fees: If sales are low and repayment takes longer, the lender may assess an additional fee of up to 10% of the borrowed amount. Late fees may also apply.
4 Merchant cash advance myths debunked
MCAs are loans
Contrary to popular opinion, this isn’t a loan but an expensive purchase of the borrower’s future credit/debit card receivables.
Unlike loans, MCAs don’t adhere to a fixed repayment schedule and have no specific lending terms. Money is automatically deducted from the borrower’s credit card processor account daily or weekly until the balance and accrued interest finishing.
You may lose business or personal assets
This is not true because you don’t need to pledge collateral to secure an MCA. The loan is secured using your future credit card sales. Thus, you only need a healthy history of annual credit sales to qualify.
Cash advances are for failing or desperate businesses
Many people associate MCAs with desperate business people who have nowhere else to turn to. That’s not always the case. Any type of business, including successful brands that need cash quickly, can obtain it to inject cash flow into their business.
With rejection rates at 63%-80%, even businesses with solid credit profiles and a long trading history face rejection when applying for SBA or traditional bank loans. Therefore, many merchants may turn to MCAs.
MCAs are the only faster source of financing
Finally, many small businesses turn to MCAs because they think they are the only faster funding source. While that could have been true many years ago, it’s no longer the case. Today there’s a crop of online lenders that offer small business loans within 24 hours at favorable terms than what you would get with one.
Visit the link in the intro to learn more about an MCA vs. a small business loan.