A merchant cash loan is not the same as a traditional small business loan. MCAs are also known as merchant cash advances. They can be used to quickly fund businesses. Because they guarantee a percentage of future sales, many lenders don’t see it as a loan. Let’s first look at how merchant cash advances work.
What is a merchant cash advance?
Cash advances from GAD does not qualify as a loan. Instead, a lender offers a merchant cash advance in the form of a lump-sum payment that is deposited into the borrower’s account within 24 to 48 hours.
GadCapital says that MCAs can be considered as personal payday loans. However, the MCAs should be repaid once the borrower has earned income. Payday loans are based on the borrower’s income. Businesses use it to refer to future sales.
There are many factors that affect how small business loans are approved. The lender will typically consider your past and current sales before making a cash advance. This will help the lender determine if the advance will be repaid in a timely manner. MCA rates are riskier than other loan options due to sales volatility.
How does merchant cash advance work?
Merchant cash advances have expanded from the days when they were only available to businesses that rely on debit and credit cards sales. MCAs are available in two formats.
The most common is the first. The history, sales, and expected income of your business are all considered by a lender. These numbers will help them determine how likely your business is to repay the advance. Based on your business’s future income, the lender will then give you either an advance or a lump amount of cash.
The refund rate is also determined by the bank. It will be deducted from your debit or credit card sales. This is known as withholding. This is the amount of credit or debit card sales your business makes each day that you use to pay your MCA. This rate is typically fixed and can vary from 10-20 percent.
A fee will also be charged, which is known as the factor rate. It’s based on your risk and likelihood of repayment. The factor rate generally ranges between 1.2 and 1.5%.
Your ability to repay your advance will increase the more transactions your company makes. You will get less money back if you have a short grace period. You may find it easier to pay off your debt by paying a smaller amount than your sales because the amount you pay for the advance is related to your sales.
Let’s say your company needs $20,000 to buy inventory. The lender will not only give you a $ 20,000 MCA, but also a 1.4-factor interest rate. This will mean that you’ll have to pay $ 28,000 in total. They will subtract 10% from your monthly credit or debit sales until the loan is paid in full.
Another option is to make regular weekly or daily deposits to your bank account. This is an ACH merchant money advance. The lender calculates your monthly income and assigns an amount to your account that will be deducted at regular intervals. This type of loan is great for businesses that do not rely on debit or credit transactions. However, the amount of your refund is not related to your sales. No matter what income you had last month, the amount deducted won’t fluctuate.
Why do companies choose MCAs?
A merchant cash advance could be a great choice for small businesses. They are easy and quick. The lender will usually review your receipts in order to determine eligibility. The application process is simple and does not involve a lot of paperwork. After approval, you can get the money in your account within 24hrs.
The reimbursement amount can be variable
Most small businesses prefer to have a variable reimbursement amount based upon sales. Small businesses don’t need funds to cover a bad month. Your sales will drop, which means your payment will also fall.
No warranty needed
Contrary to other types, cash advances are not contingent on your company having any assets. Your assets are not at risk if you can’t repay the loan. Sometimes, however, a personal assurance is required. If your business is unable to repay, you are responsible for the remainder of the debt.
Is an MCA Right For Me?
The right merchant cash advance for you will depend on many factors. The best way to know your business is to ask it. The funds are usually easy to get and can be deposited quickly. The refund amount can be tied to sales but fees and APRs for ACMs may be high. You should carefully examine the offer and look into other options before you make a decision.