Merchant Cash Advance: Revenue Based Financing
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Businesses that need quick access to capital might consider a merchant cash advance (MCA).

This form of financing can be a convenient lifeline for your business by offering an immediate, short-term financing solution to help you better manage your cashflow. This type of financing can also be a great option for businesses that otherwise wouldn’t qualify for conventional business funding.

Ready to learn if a merchant cash advance is right for your business? Let’s find out!

What is a Merchant Cash Advance?

Merchant cash advances, also called business cash advances, it is not the typical small business finance. Instead, they’re a lump-sum advance against your business’s future sales. The MCA company that advances the money establishes the cost of receiving the advance. In addition to the cash advance amount, you’ll remit an agreed-upon amount of your business’s sales, and possibly other fees.

Since a business cash advances uses fees, it sets itself apart from the typical small business funding, like business term funding and business lines of credit, MCAs are a largely unregulated financing option. 

Merchant Cash Advance Details: Fees

When you receive a business cash advance, the MCA company provides you with a one-time cash advance. You can use these funds toward any business purpose, whether it’s toward a business opportunity, addressing a critical equipment repair, or other expenses.

The provider will then set up automatic withdrawals via your business’s bank account processor; in some cases, a provider might allow remittance through a business bank account. 

A predetermined amount of each sale is forwarded to MCA company as remittance toward your merchant cash advance at recurring intervals. This arrangement continues until you’ve repaid the advance, plus fees.

Rates for Merchant Cash Advances

Merchant cash advances use a factor rate for small business funding. Factor rates are expressed as decimal multipliers — typically, between 1.15 and 1.5. The cash advance amount is multiplied by your factor rate to calculate the total combined principal and financing charges that your business owes.

For example, if you received a merchant cash advance for $40,000 at a 1.5 rate, your total requesting cost would be $60,000. Be aware that this sample calculation doesn’t include any applicable fees charged by the MCA company. 

How much a capital provider will ultimately charge for an advance depends on how long you’ve been in business, your industry, your average monthly sales, and the amount you’re requesting.

Remitting a Merchant Cash Advance

Generally, remittance is pulled from your business’s sales or from your business bank account on a daily, weekly, biweekly or monthly basis. Since the remittance timeline is directly impacted by the business’s sales volume, the time it takes to remit a merchant cash advance differs between businesses. 

Businesses that have high sales might be able to remit their merchant cash advance sooner, compared to a business that closes fewer sales.

Pros and Cons of a Merchant Cash Advance

Benefits of a Merchant Cash Advance
  • No collateral needed. Merchant cash advances don’t require collateral since remittance is automatically conducted through future sales. This can be advantageous if you don’t have collateral to offer.
  • Extremely fast funding. Generally, MCA companies can approve and fund an approved cash advance application within 24 to 72 hours. If you need cash flow urgently, you might even find a capital provider that offers merchant cash advance same-day funding.
  • Lenient qualifications and requirements. There’s typically no minimum credit score requirement or a required length of time you’ve been in business since this kind of financing isn’t a traditional small business type of funding. Instead, approval relies on other factors, like your average monthly sales figures.
Disadvantages of a Merchant Cash Advance
  • Lowers future cash flow. The capital provider automatically claims a portion of your business’s sales to satisfy any remaining unpaid cash advance. This means less cash flow that’s accessible for you to use while you’re in remittance.
  • Higher fees. The short-term nature of a merchant cash advance means that it isn’t regulated which leads to higher rates and fees than more traditional financing methods.
  • Imposes restrictions on your business. Some capital providers prohibit business owners from implementing changes that could modify their ability to remit a merchant cash advance. For example, an MCA company might limit your ability to change your business’s credit processor, change your business hours, or relocate your business while you’re in remittance.
Pros & Cons
of a Merchant Cash Advance
Pros
No collateral needed.

Merchant cash advances don’t require collateral since remittance is automatically conducted through future sales. This can be advantageous if you don’t have collateral to offer.

Fast funding.

Generally, MCA companies can approve and fund an approved cash advance application within 24 to 72 hours. If you need cash flow urgently, you might even find a lender that offers merchant cash advance same-day funding.

Flexible requirements.

There’s typically no minimum credit score requirement or a required length of time you’ve been in business since this kind of financing isn’t a traditional small business loan. Instead, approval relies on other factors, like your average monthly sales figures.

Pros & Cons
of a Merchant Cash Advance
Cons
Lowers cash flow.

The funder automatically claims a portion of your business’s sales to satisfy any remaining unpaid cash advance debt. This means less cash flow that’s accessible for you to use while you’re in remittance.

Higher fees.

The short-term nature of a merchant cash advance means that it isn’t regulated. Merchant cash advance fees are often higher than other types of small business financing options.

Imposes restrictions on your business.

Some funders prohibit business owners from implementing changes that could modify their ability to remit a merchant cash advance. For example, an MCA company might limit your ability to change your business’s credit card processor, change your business hours, or relocate your business while you’re in remittance.

What you Need for a Merchant Cash Advance 

Since merchant cash advances are an alternative business financing solution, they’re typically easier to qualify for, compared to conventional business funding. This means that there’s more flexibility if your business is relatively new or if it has a history of poor credit.

In general, monthly sales volumes must satisfy the capital provider’s criteria.

Applying for a Merchant Cash Advance

Many MCA companies let you apply for a business cash advance online. Depending on the funder, you might be asked to supply the following documentation: 

  • Identification
  • Basic business information (e.g. industry, years in business, etc.)
  • Bank statements 
  • Merchant account statements

It might also request additional information, such as accounts receivable reports, and sometimes perform a personal or business credit pull. If it conducts a credit check, remember that your business’s sales volume and the amount you’re funding are weighted more heavily.

If you’ve decided that a merchant cash advance is a fit for your needs, or you need help deciding which financing option to use, Llama Loan can help. We can connect you to vetted cash advance options in a matter of seconds and can tell you if you are making the right decision. Get started today.

The Bottom Line

Although having a reserve of cash savings for your business is ideal – it’s not always possible. A merchant cash advance can temporarily ease cash flow pressures when revenue is low or you have unusually high expenses.

Need more help determining if a merchant cash advance is right for your business? Llama Loan can help by providing a detailed analysis on which form of financing is best fit for your needs. Contact us today to get started!

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