An MCA, short for Merchant Cash Advance, is an agreement between a business owner and an alternative finance company. The business owner agrees to sell a percentage of the company’s future revenue. Additionally, the MCA provider agrees to buy the future income at a discounted rate — essentially “advancing” future revenue to the company.
This alternative funding option is similar to a payday loan, but for companies instead of individuals. It is especially attractive to small businesses that can’t qualify for traditional financing and are short on cash now but expect to have an income boost in the near future.
The MCA is one form of business financing that could be a beneficial option for your company but may not work for others. Read on to learn how an MCA works so you can carefully assess whether it is the right funding alternative for your business.
MCA Terms You Should Know
Although the following terms are not necessarily exclusive to the Merchant Cash Advance, they are fundamental to understanding how an MCA works:
- Advance — The advance is the amount of cash that the MCA provides to your business. On average, this could be anywhere between $5,000 and $500,000 depending on how much your business qualifies for based on its sales history.
- Factor rate — Your factor rate is a ratio that determines how much the advance will cost you. The rate for an MCA usually falls between 1.1 and 1.5. This number is multiplied by the advance amount to determine your payback.
- Payback — The payback is the amount of money that you will end up paying to the MCA issuer for your advance. For example, if your advance is $10,000 with a factor rate of 1.25, your payback will be $12,500 (10,000 x 1.25) plus any associated fees.
- Holdback — A holdback is the percentage of revenue withheld to repay your advance, usually somewhere between 5% and 20% of your company’s gross credit and debit card receipts. The holdback will remain in effect until the MCA provider has collected the entire amount of the agreed-upon payback.
- Payment period — The payment period is the term of the contract or the amount of time you expect it to take to pay back the advance. This could be anywhere from three months to two years; the shorter the term, the lower the factor rate.
- Payment frequency — The payment frequency is how often the holdback is calculated and automatically deducted from your account. Generally, this occurs every day, but in some cases, it could be weekly.
The MCA Application and Approval Process
The typical MCA application and approval process includes the following steps:
- The business owner fills out an application form, most likely online.
- A funding advisor contacts the business owner to discuss funding options and explain what will be needed from them.
- The business owner provides the requested supporting documentation and bank statements, often scanned and submitted digitally.
- Underwriters review the provided documents and may request additional records or landlord contact information to confirm the business address. They consider revenue and other debt to qualify the business and establish the proposed terms.
- If approved for an MCA, the business owner will receive details about the terms for which the business qualifies. This could include the maximum advance amount, payment period options, and the associated factor rates.
- The contract with the agreed-upon terms will be drawn up and signed.
- Funds are deposited into the business’s bank account.
- The business owner gives the bank authorization to transfer the holdback to the MCA provider.
Businesses That Might Use an MCA
Like many financing options, there are downsides to using an MCA; however, it may seem like the best funding choice to businesses in the following situations:
- Much of your revenue is derived from credit and debit card sales — The payback comes out of these sales automatically, so it is convenient for retail businesses, restaurants, and other credit card-based operations. However, if your business is invoice-based, it may not be the best option for your company. You may want to consider other options like the Revenued Business Card instead.
- You cannot qualify for a traditional bank loan or business credit card — MCA qualification is based on your sales history and future projections, not your credit score or collateral. Thus, it has a much higher approval rate for business with no credit history or low credit scores.
- You need money quickly — The application process could take a day or several days, especially if you need to provide additional information to underwriting. Once approved, though, funding is often available the next business day.
- Your income fluctuates from day to day — The holdback is calculated as a percentage of a business’ gross sales, which means you pay less when business is slow and more as it picks up again. There are no early payment incentives; however, if you have a spike in sales and meet your payback obligation early, you are still held to the terms of your original agreement.
An MCA May Not Work for Everyone
An MCA is a form of alternative financing for small businesses. They permit business owners who receive credit or debit card payments or have other revenue streams to procure an advance of the money flowing through the company’s merchant account.
As mentioned earlier, it can be useful for some companies, but it may not be right for everyone. For a more flexible option, consider the Revenued Business Card. This innovative financing solution empowers you to use your funds where and how you’d like.
Use it in place of a credit card to pay your business expenses, draw cash from its associated account to use when a money card is not accepted, or keep the funds in your account for a rainy day. With the Revenued Business Card, you are only charged for the money you use.
To learn more about the unrivaled flexibility of the Revenued Business Card, fill out our online form or call (855) 943-5363 today.
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