Cash advance for merchants: processing, advantages and disadvantages

A merchant cash advance (MCA) or business cash advance is a variety of loan that lends money to businesses and startups quickly and efficiently. Business financing options, along with short payment terms of typically 24 months and regular rewards, paid every business day, characterize the MCA. The system opposes the usual higher monthly payments of traditional bank loans and the associated longer disbursement times.

In general, MCA can be used to describe short-term business loans and future accounts receivable from credit card sales. This type of financing is available to companies that have a stable and continuous credit card operation, including restaurants, retail stores, pharmacies, etc.

How does a merchant cash advance work??

The process for obtaining a merchant cash advance is generally quick. The most important step is the identification verification of the company that wants the loan. The necessary documentation for this includes:

• Government issued proof of identity

• Processing of bank and credit card statements

• Business tax returns

Once the ID approval is processed and finalized, it is only a matter of days before the business receives the borrowed amount. Subsequently, they receive a lump sum and return it by generating sales to customers.

To repay the loan amount, the borrower offers a percentage of the sales, as specified in the contract, to the lender on a daily basis. It can also be done through the connected merchant account, calculated based on sales processed by debit and credit card. In this case, check and cash sales do not count towards the daily quota.

Offsets can also be taken directly from the borrower’s bank account through Automated Clearing House (ACH) payments. By this logic, small businesses with low credit and debit sales rates may also qualify for MCA by opting for ACH rebates.

MCA amounts that can be borrowed range from a few thousand dollars to more than two hundred thousand dollars. Regardless of the amount rented, the payback time is usually very short. In most cases, this is about 18 months.

Advantages of MCA:

MCA has several benefits, some of which include:

• An effortless application process: MCA involves a fast application process and it is possible to borrow money in one day. It is also easy to qualify since, in this case, the credit history of the loan is less significant than the history of sales.
• Flexibility: MCA supports numerous payment plans and methods and allows borrowers to use funds as they see fit. Since payments depend on a percentage of daily transactions, debtors do not have to pay if they have low income. It leads to cash flow problems that can lead the business into deeper debt.
• Lack of warranty: MCA loans are unsecured, which means it does not bind borrowers to any collateral. For companies with limited assets, this feature is a boon.

Cons of MCA:

The downside of MCA encompasses:

• Possible cash flow problems: MCA requires a specific amount from the borrower’s future sales dedicated to repaying the borrowed amount. This results in an issued cash flow that can lead to deeper debt for the business.
• Comparatively higher costs: The cost of obtaining an MCA, like factor rates and not interest rates, is much higher than many other types of financing. Factor rates do not depend on a specific period, and therefore paying in advance does not help you save money.