Small businesses need a regular flow of cash for conducting day to day business, expanding the business, to introduce a new line of products. If a small business needs funds to meet the short-term needs of the business, then the owner has the option of discounting future debit or credit card sales of the company to avail a cash advance quickly. This type of cash advance availed against future credit or debit card sales of the business is called Merchant cash advance. The cash advance is one of the best alternatives available for small business as it is free from lengthy processes and strict guidelines.
If you are wondering what exactly is a merchant cash advance and how does it work then below are the details.
What is a Merchant Cash Advance?
A merchant cash advance is not a loan but a cash advance against future credit/debit card sales of the company. A borrower can apply for MCA, get it approved and deposited in the bank account fairly quickly when compared to other financial options.
Merchant cash account providers evaluate the repaying capability of the borrower differently than other lenders. The MCA provider considers the sales history and sales forecast of the business to advance the loans. The amount that can be advanced to the borrower is decided based on the credit or debit card sales of the company. The small business needs to have a merchant account and receive the majority of sales payment with credit or debit card to apply and avail a MCA. This is because the lender advances lump sum against future sales of the business.
The rates on merchant cash advances differ with each lender, and today the lenders are providing the advances at competitive rates. The MCA rates can be little higher than another type of funding options but are the most convenient and easily available loans for small businesses.
How a Merchant Cash Advance Works?
The cash advance being a lump sum advance against future sales of the business, an agreement is made between the MCA provider and the business owner with all the necessary terms and conditions related to the advance. Once the agreement is signed by both the parties, funds are deposited into the business account of the borrower which can be used for any purpose.
The cash advance received is repaid as a portion of daily credit or debit card sales which is withheld by the merchant account provider to transfer it to lender account. This is called holdback and will be retained daily till the advance is entirely paid back by the borrower along with the fees if any.
The repayment being a portion of daily sales, the more the sales each day, the more will be the holdback amount. If the business is running low on the sales, then the amount of holdback will also be low, and the borrower is not obligated to pay more when the sales are low.
The merchant cash advance is free from interest and late charges. However, a standard practice of charging the borrowers with factor rate prevails in the MCA market which is determined by the lender. The factor rate charged by lenders fluctuates with each lender. Hence it is important to know, discuss and negotiate the factor rate with the MCA provider before availing the cash advance.