How To Tell If A Merchant Cash Advance Makes Sense For Your Business

How To Tell If A Merchant Cash Advance Makes Sense For Your Business
Ronis Gracie
on February 14, 2016
Read in 3 min

No matter who you are or how prosperous your small business is right  now, there will likely come a time when you need extra cash.

Perhaps the need will arise when you are in the start-up phase.

Or maybe it’ll be years later when you are in the midst of an expanding.

Whenever it happens, you will likely be overwhelmed by all the options for loans that are out there.

A merchant cash advance is just one of those options… but by the time you finish reading this article, at least you’ll know whether this type of financing is right for you.

First of all… What is a Merchant Cash Advance anyway?

With an MCA loan, you are basically selling a portion of your future receivables (typically debit and credit card receipts) in exchange for a lump sum of cash.

Retailers and independent restaurants (whose customers frequently pay with plastic) typically benefit the most from this type of loan.

How Do Merchant Cash Advance Business Loans Work?

Before you receive your merchant cash advance, you and your lender should be able to agree on the following factors:

  • Loan amount:

    The size of the lump sum that your business expects.

  • The MCA factor rate:

    This number multiplied by the cash advance amount is how much you will need to pay the lender.

    For example, if you received $20,000 in cash and negotiate a factor rate of 1.3, you will be expected to repay a total of $26,000.

  • A retrieval rate:

    This is the percentage of credit and debit card proceeds that will be remitted to the lender each month.

    For example, if your retrieval rate is 10 percent and you make $50,000 in receipts this month, you will pay the lender $5,000.

    Once the entire loan has been paid off, you will, of course, receive the full proceeds of all of your credit card transactions.

Typical Terms to Expect with an MCA

With a merchant cash advance loan, the payment structure is not determined by time: it fluctuates according to the amount of your credit receipts.

In general, however, most merchant cash advance loans are paid back in full in four to 18 months.

As for factor rates, they can range from 1.14 to 1.42.

The average retrieval rate will be somewhere between five and 15 percent.

The Pros

These loans can be very attractive to cash-strapped business owners.

This is because their approval rate is quite high.

Generally, over 50 percent of businesses are approved for these business loans, whereas only about 20 percent of companies seeking a small business loan from a major bank get the nod.

Furthermore, the approval process is quick and easy!

From start to finish, it usually only takes one to two days.

The required documentation is usually minimal, sometimes as little as four months of credit card statements, three months of bank statements and a copy of the business’s lease.

In addition, your personal credit score does not need to be high in order for you to qualify for this kind of loan.

Should your business be disrupted or credit card sales flag for whatever reason, you will not be expected to submit payments during those times.

In addition, the business owner is not held personally liable if the business goes bankrupt.

This is in marked contrast to what happens with many other kinds of business loans.

The Cons

When lenders are gauging a company’s suitability for receiving a merchant cash advance loan, they make very detailed predictions, based on previous experience and statistical evidence, concerning the timing of the payments your company will probably be able to make as well as the amount.

From these figures, they can estimate an APR or interest rate.

Should you pay off your debt earlier than expected, the APR will be higher.

Conversely, it will be lower if it takes you longer to pay.

No matter how you slice it though, merchant cash advance loans have astronomically high interest rates, sometimes as much as 80 to 85 percent.

That is why it is important to think very carefully before taking out such a loan.

You definitely do not want to be in a worse position after finally paying back what you owe than you were before you got the accounts receivable loan in the first place.

If the Pros Win Out

Should you decide to apply for this type of loan, do all you can to protect yourself.

When you apply, contact at least two companies.

Make them work for your business, playing one against the other.

Competition in this market is fierce, and this is the one and only time that you will have the upper hand.

Become a master negotiator, focusing on how getting the most positive terms will benefit your business’s bottom line for months or even years to come.

Instead of trying to lower the factor rate, concentrate on bringing the retrieval rate down.

By doing so, you will lessen the amount of money you are paying per month, lower the APR and lengthen the time you have to pay the lender back.

The merchant cash advance loan is a perfect example of a lending mechanism that has several appealing features as well as a few that are downright frightening.

As a business owner, it is important that you resist the temptation to be either blinded by the glitter of the positive or immobilized by the negatives.

Only you can know if your business has enough credit card commerce and stability to make these types of loans a viable option.

They are especially good for businesses whose income is on the upswing and who need a short-term infusion of funds to ensure that the growth can continue.

The bottom line is that merchant cash advance loans can be a very quick and uncomplicated way to get the cash you need.

Just make sure before you sign on any dotted lines that you are totally comfortable with all of the terms of the loan.

Ronis Gracie Finance Journalist

A serial entrepreneur experienced with building several small companies from the ground up and consulting for many others, Ronis understands the finer points of small business financing. He’s passionate about small business & is committed to simplifying small business lending for others.

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