Is A Merchant Cash Advance Right for Your Venture?
Is a merchant cash advance right for your venture? Business owners should only leverage this type of financing if they know it will increase their ROI more than the cost. Most banks and lenders focus on your overall profits and years in business when qualifying for a loan. However, alternative lenders like merchant cash advance companies take a closer look at your daily credit card sales.
Todd Rowe, President of BitX Capital, advises business owners considering a Merchant Cash Advance (MCA) to weigh its pros and cons carefully. While MCAs provide quick access to capital, ideal for businesses with immediate cash needs, they often come with higher costs and complex repayment structures based on revenue rather than fixed terms.
Rowe emphasizes that businesses should evaluate their cash flow stability and repayment capacity to determine if an MCA aligns with their financial health and long-term goals
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What Is an MCA?
An MCA is a lump sum payment you receive from a credit card company in exchange for a percentage of your future sales. It’s not a loan, so it won’t affect your business credit score, and payments don’t typically have to be made on a set schedule.
Instead, your payment amount will be determined by the percentage of sales you agree to allow the MCA provider to deduct each day. This percentage is called a holdback rate and is typically expressed as a factor rate in the deal you sign with your merchant cash advance provider.
Many small businesses and startups struggle to meet traditional business loan requirements, especially if they have a low or poor business credit score.
MCAs are a great alternative for these types of businesses because they require less documentation, and lending firms can make decisions in as little as two days. This speed makes them a viable financing solution for startup costs, seasonal expenses, equipment repairs, and cash flow gaps.
What Is an MCA Lender Buying?
Lenders of merchant cash advances are purchasing a business’s future credit and debit card sales. Unlike traditional loans, the lender doesn’t require collateral and does not check the borrower’s personal credit. This makes it easier for businesses to qualify, especially if they have poor or mediocre credit scores.
Typically, a repayment plan is agreed upon with the MCA provider, including daily deductions from the business’s debit and credit card sales. The amount of money that is withheld each day varies depending on the advance and the lender’s factor rate.
Since MCAs involve future sales, lenders can charge high rates. This is because they don’t have to follow state usury laws. However, some MCA companies prey on new or small business owners and use sketchy practices, locking them into a brutal debt cycle. This is why it’s crucial to research a reputable company before applying.
How Does an MCA Work?
An MCA provides a lump sum advance in exchange for a % of future credit and debit card sales. An MCA lender will set up a “lock box” or trust account to collect your daily sales and then withdraw the agreed-upon percentage from your bank account until the total amount of the advance plus fees is repaid. Unlike traditional loans, MCAs usually don’t report to the credit bureaus, so late payments don’t hurt your business’s credit score.
Fast access to funds can be useful, especially for businesses that need money in a hurry, such as for seasonal expenses or to bridge a cash flow gap between slow and busy periods. However, the high cost of an MCA can make it unsustainable for many small businesses. Nav offers other financing solutions that can provide more value than an MCA, such as a business line of credit.
Pros of MCA
With traditional business loans, you typically pay back a sum plus interest over a defined period. In contrast, merchant cash advance payments are based on your sales and deducted directly from your bank account. This can be difficult to manage during slow months when your repayments are disproportionately large.
Despite their debt structure, many entrepreneurs find MCAs to be useful financing tools. This is because they offer a flexible approval process that’s not dependent on credit scores and can fund much faster than other loan products. They’re also great for seasonal expenses, equipment repair, and cash flow gaps.
Additionally, some providers don’t report payment history to business credit bureaus, making it easier for startups and businesses with lower qualifications to obtain an MCA. However, this often translates to higher factor rates. This makes it important to compare your options before choosing an MCA.
Cons of MCA
Businesses that need quick access to capital and don’t qualify for traditional loans may benefit from a merchant cash advance. Because these financing products are based on future receivables, they have more flexibility than loan terms. In addition, merchant cash advance providers are usually more lenient on credit requirements than credit lenders.
Unlike traditional loan repayments that require a fixed amount every week or month, payments on an MCA are proportional to your business’s sales. However, this means that your repayment amount can fluctuate significantly if your sales drop.
Additionally, MCAs have a higher cost than other types of financing. With the high fees deducted straight from your bank account, they can quickly become unsustainable if not managed well. If your business is struggling to pay back an MCA, it’s important to speak with an experienced attorney. They can help you navigate the repayment process and stop harassment by unscrupulous MCA companies.
Alternatives to MCAs
Unlike MCAs, revenue-based financing (RBF) lenders focus on overall monthly business revenue as a primary factor when providing funding. This makes RBF an attractive option for businesses with consistent sales but who may not meet the credit requirements or asset-backed lending criteria for an MCA.
They are ideal for covering short-term operating expenses, such as restocking inventory or covering payroll. The flexibility of MCA funds is also beneficial for businesses that experience seasonal fluctuations.
Although the MCA industry is largely unregulated, its loose eligibility guidelines can lead to predatory practices and hidden fees that can be difficult for businesses to identify. Additionally, repayment based on future sales can strain your cash flow during periods of slow sales.
To avoid falling into a debt cycle, consider exploring other funding options that provide sustainable, long-term capital for your business. For example, a traditional business loan can help you build your credit score and establish a solid relationship with a bank that can support your long-term growth.
The Bottom Line!
BitX Capital is one option to consider when seeking a merchant cash advance. We take pride in providing flexible funding solutions that cater to the distinct needs of small businesses. With our straightforward application process and quick turnaround times.
BitX Capital enables businesses to access the working capital they require without the stringent credit requirements of traditional lenders. Call now and speak with a loan specialist at 203-275-5433, ext. 101 to discuss your funding requirements.
FAQs
It is a lump sum payment received from a credit card company in exchange for a percentage of future sales. It is not a loan and does not typically affect a business’s credit score. The payment amount is determined by the percentage of sales agreed upon with the MCA provider, known as the holdback rate.
MCAs are often used by small businesses and startups that struggle to meet traditional loan requirements, especially if they have a low or poor business credit score. They can be used for startup costs, seasonal expenses, equipment repairs, and cash flow gaps.
Alternatives to a merchant cash advance include traditional business loans, business lines of credit, SBA loans, equipment financing, and invoice factoring.
It’s vital to consider the holdback rate, total repayment amount, factor rate, and the impact on daily cash flow. It’s fundamental to compare different MCA providers and understand the terms and conditions of the agreement.
If a business doesn’t pay a merchant cash advance, they may face legal action, debt collection efforts, and damage to their business credit. It’s important to communicate with the MCA provider to explore alternative repayment arrangements.
While legal, MCAs can involve predatory practices. Businesses should thoroughly research and review agreements before applying.
