February 14, 2019 | By Mason Roberts
What Is a Merchant Cash Advance?
Merchant Cash Advances (or MCAs) are widely considered a quick, convenient solution to your financial struggles. This is because they are non-traditional loans with no collateral necessary. Though they may seem like the best option because it is so easy, there's always a catch. The annual percentage rate you are committed to paying is higher than any traditional loan (bank loan) given. With this in mind, the payment can triple in size after all of the rates are applied, which can be hard to pay out of pocket if your working capital is small. Considering this, and the repayment schedule that you are required to follow, this specific type of non-traditional lender can make you suffer financially pretty easily, if not thought through. Many times, this can put a business in serious trouble that they can’t seem to get out of, so they must file for bankruptcy in result.
How Do Merchant Cash Advances Work?
A merchant cash advances is not a bank loan, as many may assume. This means it's distributed much differently, and has much different qualifications than its more traditional cousin. It's called a “cash advance” for a reason. Whether your business is qualified for a cash advance or not is generally determined on your business revenue through credit and debit sales. The provider of merchant cash advance capital could give you a nice sum of money in exchange for reliable, future sales. In other words, the more sales your business makes, the more money you're bound to receive.
Traditional Lender VS Non-Traditional Lender
A traditional lender tends to go the traditional route, for lack of a better word. When applying for a loan from a traditional lender, you're applying through the bank directly. With this process, it may be delayed and take longer than expected, as they are very thorough in deciding who qualifies for a business loan and who doesn't make the cut. There are also many more requirements to meet than a non-traditional loan, such as collateral. Collateral plays a huge factor in the decision of how much capital you are to receive. The more valuable the collateral offered, the more money you are allowed to borrow. Though there are more qualifications, there are less rates compared to other lender options because you are going the “normal” route. A con to this type of lender is also that the bank lenders are more conservative to who they pick for a loan, because, in a way, they are investing in them, and deciding they are to be trusted. So, regardless, when it comes to a traditional lender, there are many things to be considered before you are approved.
A non-traditional lender, such as a MCA, is different. When receiving a non-traditional loan, it tends to be a short-term loan, for example. Some non-traditional lenders or alternative lenders provide amounts of capital quickly. The bigger the loan requested, however, the more documentation and bank statements required. The lender will want more information if you are requesting a larger amount of money, as there is more risk entailed. To apply for an alternative loan, you must have information about your business, such as time in business, proof of business, and bank statements of sales for the time period requested. A deciding factor upon a non-traditional loan may be how much you will be charged in interest, which can vary depending if it is a secured or unsecured loan. Secured loans are the less risky loans for lenders to take on, bringing the interest rate down. Alternative lenders also look at your credit to determine the rate of interest you will be required to pay. The better your credit score, the lower the price you're charged will be.
Should You Consider a Merchant Cash Advance?
Merchant Cash Advances are suited for businesses who need accessible cash, fast. In order to be a good candidate, your business needs a steady revenue to ensure you can pay back your loan. That means your business must have good sales. Because of this requirement, many businesses who take advantage of a merchant cash advance are retail stores or restaurants because of the number of sales they receive daily. When it comes to an alternative loan, such as a merchant cash advance, those kinds of businesses are good candidates to be considered. The whole business relies on sales. If the business is successful with high sales, they should be able to receive a cash advance without the lender being too wary. A merchant cash advance is also a good option for new business owners with a credit score that they are still steadily building. If their sales are consistent, they should receive a cash advance fairly quickly.
Why Do Businesses Really Choose Merchant Cash Advances?
There is , which many businesses struggle to come up with. This is a good thing to consider, because no matter what happens with your business, good or bad, your valuables are not at risk. You can keep everything that you love close to you and still be given a lump sum of money. It's also such a fast process that there is almost no hassle. You can even be provided your capital in as little as 24 hours, which is very different from a traditional lender.
So Is a Merchant Cash Advance The Right Choice For You?
The short answer is, maybe. There are many factors to be considered, both good and bad. A business owner should consider all their options, both traditional and non-traditional lender. Consider what each option entails: the interest rates, requirements, qualifications, payback dates, and everything in between. Decide what is best for your business first. Jumping head-first into a commitment like this can seriously impact your business, and not necessarily in a good way.
Traditional lenders and non-traditional lenders are very different. This means that the businesses they are right for are probably also very different. One has more qualifications than the other, and one has more risk than the other. Deciding which description is best for your business is the best way to go about this process if you're concerned your business may not reach the qualifications of a traditional lender, especially if it's a start-up. There is much to think about in your financial decisions. Best of luck on your journey to business funding!