Almost every small business owner will experience a working capital shortfall at some point and need access to immediate cash. In today’s financial marketplace, no matter how good a business’s financial health is, it can be difficult to obtain a traditional bank or SBA loan. If your credit history is less than perfect, it can be almost impossible. For business owners in need of immediate, short-term funding, these loans may not be the best option. There are a variety of alternative financing options that can offer fast, effective funding, including the merchant cash advance.
A merchant cash advance, or MCA, is not a loan. It’s the sale of future receivables. The alternative finance company will purchase these receivables at a discounted rate, providing the immediate capital the business needs. While they will take your credit score and the overall health of your business into consideration, the alternative finance company reviews the last three to six months of your credit card sales revenue. This will give them a basis for estimating your future credit card sales. Then they will determine how much your business qualifies to receive.
While the terms of an MCA can vary from one provider to another, the typical repayment period is less than a year. You collect payments as an agreed-upon percentage of the business’s daily credit card sales using one of two methods: split withholding or lockbox withholding.
With split withholding, the merchant’s credit card processor automatically makes the payments. With lockbox withholding, credit card revenue is sent to a special bank account. Then the bank divides it based on an agreed-upon percentage. Lastly, sends both the finance company and the business owner the appropriate amounts. This type of funding option allows the business owner to get the cash they need without going into a long term loan agreement and taking on additional debt.
The type of merchant cash advance that is most commonly known does require that a business accepts credit cards. If you think your business could benefit from an MCA but doesn’t accept credit card payments. There is another option – the ACH cash advance. This type of funding is very similar to a regular MCA. The main difference is that the bank account deposits and bank statement cash flow is used to determine the amount of funding. A business can receive as well as the repayment terms.
Once funding has been provided, the finance company will receive repayment via an ACH deduction directly from the business’s bank account on a daily or weekly basis. ACH stands for Automated Clearing House, which is a network that coordinates electronic payments and automated money transfers. With an ACH advance, a fixed daily payment is required rather than a percentage of the actual daily sales revenue.
If your business needs an immediate influx of cash, a merchant cash advance can be a great solution. Getting the cash you need when you need it can keep your business on track and moving forward. There are no restrictions on how you use an MCA, unlike a bank loan which is usually accompanied by a covenant. You retain complete control with an MCA.
It’s important to work with a knowledgeable and reputable alternative finance company. At CapFlow Funding Group, our team of professionals will evaluate your business’s unique situation and help you determine which funding option would best suit the company’s needs. We service many different industries with a variety of different funding needs. In addition to merchant cash advances, we specialize in factoring and other methods of small business funding. Contact us today!
The MCA merchant cash advance has been the subject of much controversy and confusion in recent years which may have discouraged some business owners from considering it. This is unfortunate, as merchant cash advance can be a viable option for businesses in need of working capital and it offers advantages over a traditional bank loan.
An MCA merchant cash advance is not a loan. It is the sale of future receivables. With an MCA, the merchant consents to sell an agreed-upon amount of future credit card revenues at a discounted rate. This discount is primarily determined by the risk and expected time for the funds to be recovered. For example, if a merchant agrees to sell $65,000 dollars of future credit card revenue with a factor rate of 1.3 percent, they would receive a lump sum of $50,000 dollars. The merchant gets the upfront capital they need and the MCA provider will receive a percentage of the merchant’s credit card sales until the amount of credit card revenue sold has been reached.
The MCA provider’s percentage of credit card sales, called a “holdback” or “retrieval rate,” typically ranges between five and twenty percent. This rate is based on the size of the advance, the volume of credit card revenue and the repayment terms. The MCA provider will review three to six months of credit card receipts to determine the amount the merchant is eligible to receive. The terms vary but normally span no longer than two years.
The need for additional capital can arise suddenly. It could be an equipment breakdown or an unexpected business opportunity. Whatever the reason, an MCA can provide funding much faster than a traditional bank loan. In most cases, the merchant can receive approval in hours and funding in just a few days; in certain cases, same-day funding is available.
MCA providers will review the merchant’s credit history. However, the ability to qualify is based mainly on the length of time the business has been open and the consistency of credit card sales, as that will be the source of repayment.
Flexible Repayment Amounts
Unlike a traditional loan, there is not a set monthly payment. The provider deducts payments from the daily credit card sales and calculates them according to the agreed-upon retrieval rate. For example, at a rate of 15 percent with $3000 dollars in sales, the payment would be $450 dollars. If the sales totaled $5000 dollars, the payment would be $750 dollars. Depending on the MCA provider, you can collect these payments in one of three ways:
With an MCA merchant cash advance, you can use the funding without limits. You can use it for new equipment, expansion, marketing, or any other business need. Traditional bank and SBA loans often have restrictions or covenants dictating how you can spend the funding.
At CapFlow Funding Group, our team of professionals will help evaluate each business’s unique situation and help you determine which funding option would best the company’s needs. In addition to merchant cash advances, we specialize in factoring and other methods of small business funding. Contact us today!
