In recent times, small business owners have found themselves struggling to secure funding for their companies due to the rising cost of borrowing. Banks and financial institutions have been imposing more stringent requirements to acquire a loan, making it increasingly difficult for small businesses to qualify. To make matters worse, traditional loans are often too expensive.
What is Merchant Cash Advance?
A merchant cash advance, also called an MCA, provides alternative financing to a traditional small-business loan. With an MCA, a business can receive an initial injection of capital, allowing them to quickly take advantage of opportunities and expand operations. The repayment terms are often quite flexible, as the company pays back the advance with a percentage of their daily sales – typically through credit and/or debit card transactions – plus a fee.
Merchant cash advances aren’t really loans at all – they’re more like sales that happen before credit has been approved by the customer and given their full limits.
Benefits of Merchant Cash Advance
MCA’s offer many advantages over other forms of financial assistance available today. One of the most significant benefits is the fast access to capital that these loans provide. Approval can sometimes occur within a few hours, and businesses can receive their funds within days or even hours. This is significantly faster than traditional loans, which can often take weeks.
An MCA structure also has some advantage over the structure of a conventional loan. 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.
Merchant cash advances are a good option for small business owners who collect payments through cash, checks or credit cards (as opposed to invoices), have a high volume of sales, need funding quickly or who may not qualify for a traditional bank loan.
Merchant Cash Advance Use
One of the most common reasons a small business owner would choose a merchant cash advance is to access quick funding for short-term business expenses. Other common uses for MCAs include:
Seasonal fluctuations: The small business owner’s best defense against monetary loss is an advance on their next payment. This will give them the financial cushion they need to cover any slow seasons, cover any unexpected expenses, and maintain a healthy cash flow.
Inventory: For small businesses with consistent credit/debit card sales, an MCA can be used to purchase inventory and then repaid with a percentage of the revenue from inventory sales.
Fill cash flow gaps: Many small businesses experience regular fluctuations in their cash flow, which can make it exceptionally difficult for them to pay essential bills and payroll. A merchant cash advance can function as supplementary funding until cash flow returns.
Emergency/unexpected expenses: If short-term business loans are not accessible to cover unexpected expenses, small business owners can opt for a merchant cash advance that could get them cash within a couple of days.
How Merchant Cash Advances Work
A merchant cash advance company approves your business for a specific amount of funding and provides you with a lump sum of capital upfront. Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the MCA. This is a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral required for a traditional small business loan.
Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. Should transactions be lower on any given day, the draw from the merchant account will also be less. This means during times of slow production the business’ payback is relative to their incoming merchant account deposits.
The application process isn’t as complicated as a traditional loan, which often makes the merchant cash advance approval process a faster option.
Why Online Capital?
In a world where interest rates are low because of economic uncertainty, some people may be tempted to take out loans from high-interest lenders. Merchant cash advances are a great alternative.
Small businesses often find themselves facing a variety of challenges when it comes to their finances. From cash flow issues to finding the right funding, it can be difficult to keep up with all the demands of being a small business owner.
At Online Capital, we strive to provide the very best solutions for our clients’ business needs. We work closely with each client to understand their unique situation and develop a strategy that is tailored to their needs. Our team of experienced professionals is here to help you identify the most advantageous financial options for your business.
We understand the challenges small businesses find themselves in and provide solutions to help businesses grow and resolve financial issues.