What is a Merchant Cash Advance (“MCA”)?
For a quick, one-time capital infusion into your business, the merchant cash advance (“MCA”) is an excellent option. MCAs, also known as credit card receivables funding, are a form of cash flow financing. The structure of an MCA is a lump sum of capital up front, in exchange for a fixed payback amount. Payments returned to the funder are received in the form of a fixed dollar or percentage of revenues (effectively a royalty) until the agreed upon repayment amount is met.
Payments are withdrawn directly from the bank account, on a daily or weekly basis, or remitted directly by the credit card processing company. The business’ cash flow (bank deposits or credit card processing volume) is the basis for funding as an option for short-term financing. As collateral is not required with a MCA, it is a suitable option for companies with few assets.
With same-day funding available, the typical turnaround for an advance is 2-3 business days. Often, deals under $100,000 are funded on the same day.
Benefits of an MCA
Merchant cash advances have many benefits. First off, MCAs are highly flexible, accommodating cash flow needs. Lower credit scores are not an issue, as the minimum FICO requirement is 500. Securing an MCA also helps re-establish and improve your credit score. Funding is secured by future cash flow, so if you have a solid cash flow but no assets, you can still qualify. Additionally, securing an MCA requires little stipulation compared to bank financing.
To obtain an offer, an application and four months of bank statements are required. If you process credit cards, your merchant statements will be requested as well. The financing company will require minimal documentation in order to close: a driver’s license, proof of ownership, and a void check. For larger deals, additional information such as your financial statements will be required.
MCA versus other options
When considering funding, it is good to bear in mind that equity is the most expensive option. Equity requires that a percentage of profits and losses are shared with your investor indefinitely. For MCAs, payback is provided as a fixed royalty for a fixed period. It’s perfect for high growth companies, capitalizing on opportunity, preventing disaster, or bridging your business to busy season. However if you are simply delaying the inevitable and your business is in a downward spiral, an MCA can hurt your cash flow significantly. So be careful!
Opting for a MCA is popular for many reasons. Purchasing inventory at volume in order to receive discounts can be completed quickly with an MCA. Having a short-term financing option on-hand for emergencies such as equipment failure can keep operations running smoothly.
If you’re a small business owner, you’ve probably received a fax, e-mail or phone call about obtaining a “merchant cash advance”. Merchant cash advances are a form of business funding that should, in theory, fall between a loan and an investment. Because it’s not a loan, there is no “interest” associated with it. Instead there is a fixed payback. The fixed payback is often determined by a “factor rate”, which can be deceiving because