There are different funding options available for small businesses, but merchant cash advance makes one of the best options for they are flexible and are repaid as a percentage of sales.If you are wondering what is merchant cash advance is then here are the details for you.A merchant cash advance is a lump sum amount availed by the borrower based on the sales made by credit or debit card. It should be noted that MCA is not a loan but is cash advance received by the debtor against future sales at a discounted price and the amount has to be repaid as specified in the agreement.
Merchant cash advance companies/ lenders evaluate the financial picture of the borrower based on the sales history and sales forecast and are not entirely based on the credit history, unlike traditional bank loans. The borrower repays the advance availed in small portions as a percentage of sales promptly till the entire advance availed along with the fees is paid back.
Rates on a merchant cash advance are little higher than the traditional bank loans as the lenders might approve loans to those borrowers that do not qualify for other business loans due to bad credit or low credit scores. The lenders approve the loans based on the credit/debit card sales of the business and not the credit history. Any small business considering merchant cash advance as a funding option should understand what is merchant cash advance and the terms and conditions of the agreement and in what situations it should be availed.
How does MCA work?
A purchase sale agreement is entered by the lender and the borrower for the lump sum advance availed along with the interest and factor rate specified. Once the agreement is signed by the both the parties, the amount will be deposited into the business account of the borrower.
The loan is repaid as a portion of debit /credit card sales of the borrower on a daily basis and the revenue percentage is withheld by the card merchant of the business that is transferred to the merchant cash advance lender directly. The hold back of the percentage of income continues till the cash advance is paid in full along with the fees and other charges if any. The MCA loan is free from collateral as the lender has access to borrowers’ business merchant account.
The repayment is based on the number of card sales made by the business, and hence the borrower is not obligated to pay more if the business is generating less revenue. The lower are the card sales, the lower will be the repayment of the loan and vice versa which will free the borrower from the worries of arranging funds when the revenue generated for that day is low. However, with a higher number of sales, the cash advance loan can be paid off quickly.
Repayment Terms
A merchant cash advance loan is little expensive when compared to traditional bank loans, and borrowers repay 20% or above of the amount borrowed. However, these advances make best options for small businesses with bad credit and in financial crunches where necessary funds are required. The cash advances from lenders are free from interest charges, but a factor rate is applicable on the amount borrowed which differs with each lender.