What is a Merchant Cash Advance?
What is a merchant cash advance, a MCA allows a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of the funds regularly flowing through the business’ merchant account. A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business. A small business can apply for an MCA and have an advance deposited into its account fairly quickly.
Merchant cash advance providers in the UK evaluate risk and weight credit criteria differently than a traditional banker lender might. An MCA provider looks at the daily credit card receipts to determine if the business can pay back the advance in a timely manner. Basically, the small business is selling a portion of future credit card sales to acquire capital immediately.
Rates on a merchant cash advance are typically slightly higher than other small business loan options provided by mainstream lenders. An MCA provider will often approve an advance for a business that might not qualify for a business loan, but has a steady influx of credit card payments. Any business owner considering this option should make sure he or she understands the terms being offered so they can make an informed decision about potential ROI.
How Does a Merchant Cash Advance Work?
An agreement is made between the UK small business and the MCA provider regarding the advance amount, payback amount, and holdback percentage. Once an agreement is made, the advance is transferred to the business’ bank account in exchange for a future percentage of receivables or credit card receipts.
Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the Merchant Cash Advance. This is called a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral required for a traditional small business loan.
Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. And, should transactions be lower on any given day, the draw from the merchant account will also be less. This means during times of slow business, the business’ payback is relative to their incoming merchant account deposits.
Repayment and Loan Costs
A business that uses a merchant cash advance, according to several MCA provides, may pay back 10%-20% (or more) of the amount borrowed. This percentage is frequently displayed as a factor rate, which would equivalently be 1.20 – 1.40.
NOTE: There’s a difference between the holdback amount a small business pays every day (as a percentage of their receivables) and the repayment amount for the entire advance. There could, for instance, be a holdback of 10%, and a repayment of 20%, so it’s important for the business owner to understand the distinction.
What are the benefits of merchant cash advances?
Flexible and scalable finance
Usually repayments are made as a percentage of revenue — so they go up and down proportionally with your business’s income. That means when things are going well, you pay more back each month, but if the business is going through a lean period you’ll pay a smaller amount. It’s a good arrangement for many companies, because unlike fixed payment finance, you can have more reassurance that you’ll be able to make payments if you hit a bump in the road.
Another benefit of merchant cash advances is that repayments can seem relatively painless. Because the lender works directly with the card terminal provider, the percentage they take for repayments is never in your business’s bank account, but instead is ‘taken at source’ — in much the same way that most people pay income tax.
Unlike other types of finance, the money is taken automatically until the debt is paid, so it’s a ‘hands-off’ setup from the point of view of the business owner. That means you can spend less time worrying about finances, and more time running your business
Is a Merchant Cash Advance Right for Your Business?
An Merchant Cash Advance is an option when a business needs to access capital quickly. The business needs to have adequate cash flowing through their merchant account each day to make payments on the advance, and the loan purpose can justify the expense of the advance. Credit requirements are typically less than a small business loan, it could be an option for a business that does a lot of credit card transactions every month but has a weak credit profile.
Hope you enjoyed this quick gig about ” What is a Merchant Cash Advance” . If you like a cost for a merchant cash advance please complete our online enquiry form and a business funding specialist will contact you by return.