Home Jersey finance news Could a merchant cash advance be right for my business?

Could a merchant cash advance be right for my business?


Working in fintech and payment solutions for the past 10 years has been an eye-opening experience. Through the work of my company providing merchant capital to businesses, we have found that many small and medium-sized businesses seem to struggle to find the working capital they need to support themselves and grow.

In the right situation, a merchant cash advance (MCA) can be a good option for some businesses. An MCA is financing secured by the future sales of the business. It provides initial capital in exchange for a slice of the company’s credit and debit card sales volume or daily bank deposits until the advance is repaid in full, plus fees for costs funds.

An MCA is not a bank loan where you have a fixed monthly payment with an interest rate. The cost of money varies, but it is based on a factor rate, not an interest rate. Usually, factor ratios range from 1.1 to 1.5. For example, if you borrowed $100,000 with a factor rate of 1.2, your total repayment amount would be $120,000.

Retrieval payments can be withdrawn daily directly from the bank account where cash and credit and debit card sales deposits are made for a fixed term. The term in which the money is repaid varies, but generally it ranges from three to 18 months, with most advances falling in the range of six to 12 months.

If you have the time, credit, and collateral to go to a big bank and get a loan, you should consider that because the cost of money will be cheaper. However, for any business owners who need money now, have bad credit, or don’t have any collateral other than their business’ cash flow, an MCA may be an option worth considering.

When researching capital and specifically considering an MCA, it is important to be aware of all the potential setbacks of this type of loan option. Two of the potential risks of an MCA are the short term on the advance and the cost of money.

The payback period is usually six to 12 months, which means that a significant percentage of your credit and debit card sales or daily income deposits will be used to repay the advance. This percentage will fluctuate depending on the terms of your approval; however, expect at least 10% to 12% of your credit and debit card sales or daily income deposits to be refunded. As a business owner, you will need to ensure your business is cash flow positive and in a sustainable position to avoid financially overburdening your business.

The cost of an advance is usually considerably higher than your standard bank loan. A key to whether you should consider taking an MCA over a more traditional loan option, like a small business loan or line of credit, could be determined by the urgency of your needs. If your need for financing is immediate, the value of quick financing with an MCA could be justified, provided you have the cash to repay the advance. However, if you can postpone your need for funding and explore other channels, we suggest you do so in order to properly consider other options.

Although it can help with the terms of your cash advance, having good credit is not a requirement. In fact, you can have bad credit and be approved because the money is guaranteed by your future sales. Although credit is a factor, it is not the determining factor in obtaining approval.

One of the other benefits of an MCA is that a personal money guarantee is not always required. The advance can often be strictly in the name of the business. This means that your personal credit as the owner of the business will not necessarily be tied up front and you will not personally assume any liability. There are times when a personal guarantee or security, such as real estate, may be required, depending on the amount of advance you request. Generally, if you stay between 100% and 150% of your monthly income stream, collateral will not be required. However, if you are requesting 150% or more of your average monthly sales, more stringent requirements may be needed for approval.

In summary, MCAs can be a valid option in specific situations where time, credit or collateral other than your business cash flow is not available. The next time you need financing for your business, consider whether an MCA might work for you, but be sure to do your research and be prepared for any potential pitfalls, such as the repayment term and the cost of money.

The best way to make sure you’re making the right financing decision is to shop around and consider all of your options. Here are some tips to help you shop around for financing.

Create a set of relevant financial details of your business that is easily deliverable to lenders. This will save you the time and frustration of having to piece together this information each time you speak with a new lender. The package should include:

• Income tax returns for companies and individuals for the last two years

• Reports on profits and losses for the last six to 12 months

• Company bank account statements for the last 6 months

• Merchant processes statements for the last 6 months

Research lenders before sending them your financial information. Make sure they lend to businesses in your industry. Also, check their credibility by reading online reviews and checking their Better Business Bureau ratings.

Be prepared to hear no in response to some of your loan requests, but also to quickly move past the no and seek out another institution that will help you. Be aware that each lending institution lends according to different criteria and that there is generally a lender for each type of business.