A Merchant Cash Advance or MCA Loan can be Very Fast but Expensive
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Is a Merchant Cash Advance Working Capital at an Expensive Price?
Small business funding or financing issues impact over 50% of current business owners. Merchant cash advances (MCA) seem easy to inject working capital into operations. However, depending on the information on your credit score, other funding options can be safer with a lower cost. That is why we want you to understand merchant cash advance or MCA loans and how they work versus a traditional bank line of credit or A/R factoring. We fund start-ups and fast-growing entrepreneurs from Hawaii to New York and Alaska to Florida.
Turn invoices, accounts receivable, debit, and credit card proceeds into same-day working capital. Get a merchant cash advance or loan to alleviate cash flow problems. Whether you use credit card processing or not, you repay the advance weekly with an ACH withdrawal or from factoring proceeds with low factor rates. This program is designed for not yet bankable small businesses.
Small business owners can have limited options for working capital if they are less than two years in business, are losing money, or have bruised personal credit. With unpaid accounts receivable (A/R), your business can fund operations within five days. Avoid a credit limit hindering your growth and obtain a factor rate better than an MCA loan. Contact Bankers Factoring today to receive Business Financing through Receivable Factoring.
MCA History
Originally for retail merchants taking credit cards via their merchant account, MCA loans were based on your daily credit card sales. They came with a daily or weekly repayment period. Now, MCA loans include all revenue types and are based on your industry type, monthly business checking account inflows/outflows, NSfs, and High/Low checking account balances. But they are still very expensive compared to traditional loans. Their factor rate of 1.2-1.4 can compute to an APR of 50-150% interest. Even though their credit requirements can be minimal, the payback amount of the loan repayment can ruin a small business.
Your open accounts receivable and checking account flows can help secure a lump sum payment for your business. We want you to know about merchant cash loans or advances.
Real estate tends to be very illiquid, but some products, like SBA loans, can access the equity in real estate via small business loans or bank loans from Hawaii to New York.
For most small businesses, the initial capital needed to start and grow a business can be hard to come by. Many entrepreneurs are turning to merchant cash advances as an alternative funding source. In this post, we’ll cover what a merchant cash advance is and how it works so you can decide if this type of financing makes sense for your company versus business factoring.
Need help with payroll funding? Read about small business payroll funding that is not personal or business credit score-driven and gives you the cheapest non-bank cash advance.
What is a merchant cash advance or business cash advance?
The terms “merchant cash advance,” “merchant loan,” and “MCA loan” are often used interchangeably. A merchant cash advance is a business loan providing you with funding upfront for future payments as consideration. MCA loans help businesses with poor credit and customer accounts by solving cash flow issues through sales revenue.
Like many small business owners, do you already have an SBA loan? Read about getting a business cash advance funding available for companies with an SBA loan in place.
A significant issue with merchant cash advance (MCA) advances is the requirement to make fixed daily or weekly withdrawals to pay off the cash advance. A lender may provide funding through an MCA or cash flow loan, but your company will have very low cash flow once their repayment terms are in effect.
Merchant cash advance or MCA financing allows your business to receive funding immediately and pay it back with future credit or debit card payments from your customers. Cash management is a major issue for companies that extend credit terms to their customer base.
You can also read how to obtain funding after a bank loan denial for traditional bank loans and still qualify for a business cash advance even when you are turned down for numerous traditional bank loans.
A better method for quick, short-term funding is selling your unpaid invoices. Invoice factoring is less costly than MCA’s and provides cash protection from customer default. At the same time, the MCA loan leaves your company on the hook.
Repayment terms vary from merchant cash advance or MCA providers, but programs typically run high interest rates. Also, with this type of loan, most of your future credit card payments will disappear to the lender.
Read our previous article, Are Merchant Cash Advances a Scam for small businesses? also, Revenue Based Financing for Small Business an Essential Guide
Why should you avoid MCA Loans?
Business owners quickly make a deal when they find access to working capital. However, MCA loans seem like a good idea initially, but they come with strict conditions and repayment terms. Also, the high interest rates of 70-300% with merchant advances create a situation where you will eventually repay much more than you borrowed.
With invoice factoring, you only have a fixed percentage of your A/R value per 30 days, around 1% to 2%, which is your cost of money. Due to the financing structure compared to merchant cash advance loans, invoice factoring will save your company thousands of dollars with a cost similar to swiping a credit card.
- High-interest rates
- Fixed repayments
- Complex contract agreements
- A continuous cycle of debt – never cash flow positive
- Bad Better Business Bureau rating among cash advance companies
- Based on your credit card sales only, not all your sales
- Feeling pressure to get a merchant cash loan
- Based on your personal credit score, not your small business customer’s credit bureaus
What is the difference between MCA’s and cash flow loans?
A merchant cash advance or business cash advance is a short-term loan to fund your business. A loan, on the other hand, is a long-term financial commitment. Both forms of business funding help relieve daily cash flow issues. The application process can differ between SBA Loans and merchant cash advances (MCA).
The easiest application process for fast business funding is with Banker Factoring. Our 100% online process enables your company to deposit cash within 3 to 5 days. If you have unpaid A/R invoices, invoice factoring is the easiest method to cover cash flow issues and have access to working capital.
MCA loans provide businesses with fast working capital based on future sales through credit. Your company gets a lump sum, repaid through daily credit card transactions or ACH withdrawals from your business account. Merchant advances require fixed repayment, unlike factor financing. A more efficient funding vehicle is factoring invoices.
If your company has daily or weekly payroll issues, selling unpaid invoices is the best solution to finance your plans. Invoice funding is a better solution than MCA loans for businesses needing funding. When selling invoices, your factoring rate is accounted for, which means you have no recurring repayments or interest to worry about.
The standard solution for short-term cash flow bridges is to sell unpaid invoices. Also called factoring invoices, this is an easy method of boosting cash flow and executing business operations.
Please read understanding factoring rates and fees versus how a small business loan line of credit is priced.
In general terms, a merchant cash advance or MCA Loan:
- Loans are secured by collateral (e.g., a house or car). If you fail to make payments on your loan, the lender will seize your collateral and sell it off to recoup their losses from lending you money in the first place.
- MCA funding is more flexible than small business administration loans with minimum requirements and available with poor credit.
- Your credit score will matter for both types of loans. MCA loans may only require a soft credit pull.
Read our previous article, “A Guide to Acquiring a Line of Credit with Bad Credit.”
How does a merchant cash advance work?
A merchant cash advance is a short-term loan for businesses. It’s a type of financing that requires you to apply for credit. A FICO Score or a credit report from a major credit bureau is typically required.
Business lending, such as a small business loan, depends on a complex credit report and established financial statements. However, another mainstream funding tool is factoring invoices or selling uncollected accounts receivable. Invoice factoring can save money, protect your cash flow, and help your business grow – MCA loans rarely do the same.
The merchant cash advance process for small businesses involves three steps:
- You apply online or by phone, submitting four months of business bank statements (minimum requirements).
- The MCA credit staff review your cash advance with a bad credit rating.
- The provider sends you a quote.
- Once approved, the MCA financing company deposits funds directly into your bank account (or PayPal account).
- You pay back the advance based on future credit card sales or future receivables.
If your business has cash flow issues, read our article, 12 Most Common Business Cash Flow Problems and Solutions.
Is a merchant cash advance worth it?
Merchant cash advances are a viable way for small businesses to get funding. If you need capital and want to grow your company, consider applying for a merchant cash advance. Understanding other mainstream funding sources versus merchant cash advance companies is essential, as non-recourse invoice factoring can help.
Non-recourse factoring is a smarter option to fund your business during a cash flow crunch, overextending customer credit, or facing seasonal sales. A merchant cash advance MCA ties up your future cash flows in a fixed manner—once you sell your invoices, you are responsible for accruing interest fees. Interest fees kill your cash flow and bottom-line profitability.
You can use the money to pay off debt, purchase equipment or software, or hire new employees. If you are a business owner with bad credit, this limits your options to invoice factoring or merchant cash advances. It would help if you had a financing option if turned down for business loans. Factor financing allows you to access different types of credit for a fraction of the cost and is more flexible than business loans.
Merchant cash advances are a risky way to get funding for your small business.
A business cash advance or merchant cash advance MCA is a risky way to get funding for your business, and it can be tough to repay the advance based on your future sales. On the other hand, offloading unpaid invoices and immediately creating positive working capital have more protection. MCA loans require fixed repayments. Once you sell invoices, the factoring rates are taken off the top. Invoice factoring is a viable method to get business funding for companies in tough financial situations.
Invoice factoring can be used to grow your business, pay off debt, working capital business needs, and more. However, other sources for working capital, like non-recourse factoring, can give you access to capital, save you money, and build your credit score.
- You will receive the funds quickly. It only takes a few days or weeks until you have access to the money in your account so you can use it immediately. This means there’s no need to wait months before receiving funding; it should be available immediately.
- You need not worry about interest rates or collateral in invoice factoring because these only apply to a traditional loan. The only thing that matters is how much profit you make on each transaction (the “margin”) to the business owner.
Merchant Cash Advance Companies or MCA Loan Conclusion
Merchant cash advance companies are a viable option for small business owners who need business cash advance funding, but they come with a steep interest rate cost—three times that of a credit card. But if your credit cards are maxed out from funding your business, they can be an alternative cash advance funding source. A business cash advance is based on your future credit card sales if you are a retail business.
Invoice factoring funding is simpler to apply for and can quickly provide the money you need. The key is finding the right provider so both parties benefit from this financing arrangement. Banker Factoring is not based on your credit scores but on your customers’ credit scores. The implied interest rate is similar to the cost of your credit cards for small business financing.
Different credit scoring models can hurt your chances of commercial financing. At Bankers Factoring, our team of factoring leaders customizes a plan that saves your company from major losses, even without credit card sales. Receive money in your business bank account today based on future receivables.