When it comes to financing your business, you’ve got plenty of choices. For organizations with an established history and good credit scores, a traditional loan is a great option. But if you haven’t been in business that long and don’t have an extensive credit history, you will probably need to look at alternative financing.
One of the most popular types of alternative financing is the Merchant Cash Advance (MCA). Here we’ll explore what an MCA is, how it works and whether it could be right for your business.
A definition of a merchant cash advance is: A financial transaction between a business owner and an alternative financing company. The company agrees to the sale of a percentage of the business’ future cash flow. The finance company agrees to purchase the business’ future receivables at a discounted rate, essentially “advancing” future business revenue. The business owner pays off the MCA with a daily payment withdrawn until the full amount that was agreed upon has been received by the funder.
Let’s break down what that means.
A merchant cash advance is a type of alternative small business financing. An MCA provider advances you funds now in exchange for a share of your future business revenue until the funds and any fees are paid off. There are several unique aspects of an MCA:
An MCA provider does not place significant emphasis on your time in business, credit history or credit scores when they decide to advance you money. Instead, they will look at the historical and projected revenue of your business — especially funds collected by debit, credit or charge cards. An MCA provider will expect:
There are four main components to a merchant cash advance:
The funding amount: How much is advanced to your business
The total payback amount: The amount advanced plus the factor rate
The term length: The number of days until the advance is paid back
Factor rate
One of the most important areas is the factor rate, so let’s explore that in more detail.
A factor rate represents the discount taken by the MCA provider buying your future revenue. Because MCAs are advances of future revenues — and not loans — no interest is involved.
The rate varies but generally falls somewhere between 1.1 and 1.5. The MCA provider will determine your specific rate based on a number of variables, including consistent monthly revenue, no negative balance days, and other debt obligations. For example, if the MCA provider advances you $10,000 with a 1.2 factor rate, you will be expected to ACH $12,000 over the agreed purchase period. The faster you agree to remit the purchased receivables , the lower your factor will be.
An MCA provider, also known as a “funder” will need to know what your business does, its history, revenue, and how much capital you’re looking for. They will then determine how much they are able to advance your business, the daily ACH amount, factor rate and term length.
Here’s how this might look in practice.
Total advance | $10,000 | $20,000 |
|---|---|---|
Factor rate | 1.25 | 1.2 |
Purchased receivables amount | $12,500 | $24,000 |
Average daily sales | $800 | $1,500 |
Amount sent to MCA provider | 15% | 20% |
Daily ACH | $120 | $130 |
Term Length (Days) | 104 | 80 |
Here’s what is typically involved in the application and approval process:
It’s vital to have all the supporting documents and bank information you need as soon as you begin the MCA application process. This will speed up approvals so you are able to receive a funding decision more quickly.
If the following points apply to your business, then a merchant cash advance might be perfect to meet your growing capital needs:
You understand the terms of the MCA, the use of automated payments by ACH from your account to the MCA provider and the factor rate which is the cost of
We’re experts in analyzing your business and providing competitively-priced MCAs. If you need funding quickly, we’re here to help. Our application process is fast and simple, and we can have the money to your bank account in less than a week. Apply now.
Credit cards can also help your business develop a credit history, which is important should you want to secure business financing or more favorable credit terms in the future.
By Jennifer SokolowskyNo business owner wants to be in the red or pay avoidable fees — but when it happens, it’s important to have a plan. Setting up a line of credit to cover your businesses overdraft fees is one option.
By Chris KellerWhen it comes to financial solutions for your small business, finding the right banking partner can be a challenge. As a key player in the mobile and online banking industry, Capital One is a partner worth consideration. We’ve dug a bit deeper and actually used a Capital One bank account. Here’s what we found out: […]
By Kayla GomezThe PayPal Business Debit MasterCard can be a convenient way for businesses that use PayPal to access the funds in their PayPal account. It’s important to know exactly how this card works — including overdraft features — to determine if it’s a good choice for your business and to use it correctly.
By Jennifer Sokolowsky