If your business is suffering from cash flow issues, you’re not alone. In fact, according to a survey from U.S. Bank, 82% of small businesses fail because of cash flow problems. Cash flow issues happen when your monthly expenses exceed the amount of cash you have on hand. The cause might be slow sales or customers falling behind on payments. Poor cash flow hurts your ability to invest in your business and affects your daily operations.
If you’ve been dealing with cash flow issues, maybe you’re considering some type of small business funding. In some cases, a merchant cash advance is a useful option. But be careful: MCAs are expensive, and they aren’t federally regulated.
A merchant cash advance (MCA) allows you to cover temporary cash flow problems with future sales. You’ll receive a one-time, lump-sum payment and then repay the funds with a percentage of your sales over time.
An MCA could be a good option for businesses that process a high volume of credit card transactions and need fast access to cash. If your business doesn’t accept credit card transactions, an MCA won’t be an option for you.
Applying for and receiving an MCA is a relatively quick process. The amount you’re approved for will depend on the volume of your daily credit card transactions.
You could receive anywhere from a few thousand dollars to over $200,000, and you might be able to access the funds in just a few days. However, the repayment terms are typically short, often less than 18 months.
The cost depends on the amount you receive and your factor rate, which ranges from 1.1 to 1.5. Your business’s financial strength determines your factor rate. A better credit score translates to a lower factor rate.
For example, let’s say you receive an MCA for $100,000, and your factor rate is 1.2. That means you’ll owe $120,000 in total.
Your lender will take a percentage of your daily credit card transactions until funds are repaid. This percentage is known as the holdback rate, and it usually ranges from 10% to 20%.
Most lenders deduct these funds from your account automatically. The repayment terms are based on a percentage of your daily sales, so you won’t find yourself in a financial bind if sales suddenly slow down in your business.
Although MCAs don’t have the best reputation, there are times when taking out one could be the right choice for your business. For instance, they can be a good option for businesses that need fast access to cash but don’t qualify for a loan from the bank.
Even if you do qualify for a loan, you may need immediate access to funds. MCAs are processed much faster than small business loans and come with minimal paperwork.
Overall, MCAs are a good option for businesses that need fast funding to cover short-term expenses. If you run a seasonal business, need to cover temporary cash flow issues, or pay for a one-time business expense, an MCA could help.
It’s easy to qualify for an MCA because, unlike with a small business loan, you don’t have to show years of business history. In many cases, you don’t even need excellent credit history to qualify.
You will need to be able to show at least six months of credit card transactions. A history of good sales can make it easier for small business owners with bad credit to qualify.
Traditional banks don’t typically offer MCAs, so you’ll need an alternative lender. Lending marketplaces are a good place to look because you can fill out a single application and compare offers from multiple lenders.
Once you’ve found a lender, you’ll fill out the application and provide the following information:
Alternative lenders have distinct advantages and disadvantages that you should be aware of before accepting a loan.
The application and approval process for MCAs is quick and easy, and the funds can be used for anything. But they can be very expensive and won’t help you build credit.
When you take out an MCA, your lender will automatically deduct a percentage of your daily credit card sales from your bank account. These payments will continue until the cash advance is repaid in full.
The repayment period usually lasts up to 18 months. The higher your sales are, the faster you’ll repay the advance.
The consequences for defaulting on an MCA depend on the exact terms of your agreement. MCAs aren’t considered loans, so they aren’t governed by usury laws. Instead, MCAs are considered a purchase contract between you and the lender.
If you default, your lender could sue you for the amount you owe them, and you could put your personal and business assets at risk. If you’re concerned about the possibility of default, your best bet is to try to renegotiate the terms of your agreement with your lender.
No, an MCA is not considered a loan, and your lender won’t report timely payments to the credit bureaus. That means an MCA won’t help you build your business credit score. But it also means that if you fall behind on your payments, it won’t hurt your score either.
If you’re looking for alternatives to an MCA, here are some options to consider.