Merchant Cash Advance was originally structured as a lump sum payment to a business in exchange for an agreed upon percentage of future credit card and/or debit card sales.
Notion Merchant Cash Advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income, directly from the processor that clears and settles the credit card payment. A company’s remittances are drawn from customers’ debit- and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with card-payment processors and take payments directly from a business owner’s card-swipe terminal.These Merchant Cash Advances are not loans – they are a sale of a portion of future credit and/or debit card sales. Therefore merchant cash advance companies claim that they are not bound by state usury laws which limit lenders from charging excessive interest rates. This technicality allows them to operate in a largely unregulated market and charge much higher interest rates than banks. This structure has some advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner’s personal credit scores, Merchant Cash Advances offer an alternative to businesses who may not qualify for a conventional loan.
Usage Merchant cash advances are most often used by retail businesses that do not qualify for regular bank loans, and are generally more expensive than bank loans. Competition and innovation led to downward pressure on rates and terms are now more closely correlated with an applicant’s FICO score.
Generally there are three different types of repayment methods for the business.
1. ACH (Automated Clearing House) Withholding: When structured as a sale, the finance company receives the credit card processing information and deducts its portion directly from the business’s checking account via ACH. When structured as a loan, the finance company debits a fixed amount daily regardless of business sales activity.
2. Lock Box or Trust Bank Account Withholding: All of the business’s credit card sales are deposited into bank account controlled by the finance company and then the agreed upon portion is forwarded onto the business via ACH (Automated Clearing House), EFT ( Electronic Funds Transfer) or wire. This is the least preferred method since it results in a one-day delay in the business receiving the proceeds of their credit card sales.
3. Split Withholding: When the credit card processing company automatically splits the credit card sales between the business and the finance company per the agreed portion (generally 10% to 22%). This is generally the most common and preferred method of collecting funds for both the clients and finance companies since it is seamless.
Opting for a merchant cash advance is a decision made by small business owners every day of the week across this country. If you’re having a hard time establishing a business line of credit or getting approved for a business loan, a merchant cash advance may very well be the best option available to you to help you finance your business.
Here are reasons why a business cash advance makes sense.
A. Can take out more advances as advance is repaid
Most business loans will not be extended as you pay off your balance, but with a merchant cash advance, you can get more money as you pay off your advance.
B. Even with less-than-perfect credit, you can be approved
No worries about being approved if you have less-than-perfect credit, a high credit score is not a major factor in whether you are can receive business funding from a cash advance.
C. Flexible repayment terms – repayment is based on sales volume, not a flat rate
Some businesses can run into financial hardships with traditional business loans that require flat-rate monthly payments, but with merchant cash advances your monthly payments are dependent on your sales volume. This means that if you have a slow month, you pay back less.
D. Frees up time because of the simple application/approval process
The application and waiting process for a business loan or even a business line of credit can be outstanding –sometimes you have to wait 30 days just to receive notice of approval from your application, add the wait time to the back and forth calls, document signing, etc – and it can be an arduous process. However, by choosing a merchant cash advance, you can quickly qualify online or by phone.
E. Gives you more money in your pocket to improve cash flow
Cash advances can give you the opportunity to receive more money than you would be able to borrow from a bank.
F. Gives you money right away
With a merchant cash advance you literally can have your cash in as little as 72 hours from your applications approval – and most businesses get their funding in less than a week. Now that’s a simple process
G. New business friendly
Many small business loans require that you have a well-established business (2 years or more) to even consider you for business funding. With a cash advance, you can receive funding even if your company is newly in business.
H. No personal liability for repayment of the cash advance
Much unlike with business lines of credit and small business loans, you are not personally responsible for repayment of the advancement.
I. Non-restrictive usage on what you use the funding for
Too many times business owners are restricted by what they can do with their business loans. But, because a cash advance is designed to help you improve your cash flow, you can use your new funds wherever your business needs them.
J. Qualification is easier than with traditional business loans
Banks have a lot of stipulations for businesses that they loan money to or extend credit lines – cash advances have minimal qualifications and high approval rates.
