What is a Merchant Cash Advance Loans for Small Business?
Instead of getting a payday advance online, a business cash advance is a more intelligent alternative finance option for small businesses. That’s because the amount you can borrow is linked directly to the amount of funds your business anticipates taking in credit and debit card transactions.
Put simply, any business that utilizes a debit and credit card terminal to accept payments from consumers will have a provider for their card terminal. When it comes to merchant cash advances, lenders work closely with your business’ terminal provider to provide total visibility over your cashflow from credit and debit card transactions.
Subsequently, there’s no requirement for credit checks, as prospective lenders can quickly ascertain how much your business makes in a typical month and can therefore propose a loan figure and repayment period as quickly as safe online payday loans.
What is Holdback?
As part of most cash advance loans, the lender will require your business to set aside a small percentage of your daily revenue generated from debit and credit card transactions. This figure is withheld and repaid to the lender to pay off the lump sum received i.e. the merchant cash advance.
So what is holdback? This percentage of income that’s set aside is what's known as the “holdback”, and will continue until the entire merchant cash advance is repaid to the lender in full.
How Does a Merchant Cash Advance Work?
Merchant cash advance companies work in a slightly different way to conventional business loan firms. In simple terms, a merchant cash advance requires your business to sell your future credit and debit card sales at a discount figure, so that you can get your hands on a lump sum up front.
The holdback – the percentage of your daily card sales – will be sent directly to the lender via your card terminal provider, which means that you have no risk of missing payments, like you might have with even the best online payday loans. The similarities with quick cash payday loans are that the interest rates for merchant cash advances and payday loans are agreed at the very start of your borrowing.
Legality of Merchant Cash Advance
Some people have called the legitimacy of a business cash advance into question, claiming this type of alternative funding is illegal. In the US, the Federal Trade Commission (FTC) has launched a thorough investigation into cash advance loans online due to potentially unfair contract terms imposed by online payday loans direct lenders.
However, the reality of the matter is that merchant cash advances are not meant to be viewed as loans and are therefore almost wholly unregulated. They aren’t subject to usury laws or banking laws such as the Truth in Lending Act.
Merchant cash advances are therefore not prohibited and are designed to work along the same lines as a credit line for businesses. While a conventional credit line is lent to firms based exclusively on their credit history and profitability, as are the best online payday loans instant approval firms, business cash advances are only concerned with a company’s track record in terms of sales and how they are performing with credit and debit card transactions.
The Main Benefits of MCAs
Before you take the plunge with a quick cash advance online for your business, it’s important to educate yourself fully about all the benefits and drawbacks of a merchant cash advance.
Some of the pros make it obvious as to why retail businesses should seek this form of alternative finance instead of quick cash payday loans, with quick and easy online payday loans often subject to extortionate rates of interest.
If your company requires a much-needed injection of cash, a business cash advance is one of the fastest ways to do so. You can get a swift decision on your advance that does not have implications for your firm’s credit score. If you are successful, you can receive the agreed lump sum in a matter of hours.
The application process for a merchant cash advance is much more straightforward than applying for a personal or business loan. The application does not scrutinize your credit score, it merely seeks to understand your sales history to demonstrate that your company has enough sales volume in card transactions to merit lending of an agreed value.
Unsecured, No Collateral
All business cash advances available online are unsecured forms of finance. This means that you don’t need to provide collateral in the form of personal or business assets to lend against. Therefore, this type of cash advance offers reduced risk, particularly for new businesses with minimal credit ratings and trading history.
Money Arrives Quickly
If you need funds to make quick business decisions or investments, cash advances are a great way of keeping your company fluid and agile. The pre-agreed advance can be transferred into your company bank account within a matter of hours or the next working day.
Credit does not need to be high
Your business cash advance does not need to be an astronomical figure. Most alternative finance lenders will offer lump sums for as little as a couple of thousand dollars, which can be repaid through your card transactions over a period of months.
Lower Payments with Lower Sales
The repayments for business cash advances are usually made on a sliding scale, aligned with your total monthly card transactions. The pre-agreed repayments are often a small percentage of your card sales. If you have a quiet month, the size of your repayments will diminish as you’ll always repay the same percentage of your monthly card sales.
The flexibility of merchant cash advance repayments is particularly beneficial to businesses that experience fluctuating sales throughout the year, such as firms reliant on seasonal sales. You can be sure that you won’t be hamstrung by large repayments during months when sales are lower.
Although the available credit of an online business cash advance does not have to be high, at the other end of the spectrum there are some lenders willing to lend five-figure lump sums against your debit and credit card transactions too.
Drawbacks of MCAs
Of course, we’re keen to ensure that this guide to MCAs is as objective as possible, so it’s important when discussing and comparing MCA lenders that we assess the potential drawbacks of an MCA merchant cash advance too. Here are a few reasons to be wary of an MCA cash advance.
When you include all the fees and interest involved in a merchant cash advance, it’s not uncommon for the annual percentage rate (APR) to range from 40% into three-figure percentages. These APRs are typically much higher than traditional bank loans available to small businesses, but still somewhat lower than quick online payday loans.
The APR of an MCA is not just based on the total fees paid via cards, it’s also dependent upon how quickly you repay the advance. If you experience a period of weak card sales, your payments are spread out over a longer period and your overall APR subsequently falls. If your business experiences a period of buoyant card sales you might repay the MCA quicker, but pay a much higher APR over a shorter timeframe.
As we’ve already mentioned, merchant cash advances are entirely unregulated due to their structural nature. MCAs are commercial transactions, rather than formal business loans. Although MCAs are therefore free from federal oversight, they are still regulated by the Uniform Commercial Code in each individual US state.
Main Types of Cash Advances
There are four different types of merchant cash advance that your business can get its hands on, providing you can demonstrate regular and reliable debit and credit card sales:
Short-term business cash advances are brief lending facilities that allow you to repay your lump sum over a period of months, rather than years.
The longest common period for a merchant cash advance is up to 24 months. Any longer and the lender is taking a bigger risk that you will potentially default. That’s why short-term MCA facilities tend to be more readily available.
In some cases, your business may find itself in need of additional finance before your first MCA has been fully paid off. It’s possible to secure a second MCA with the same lender or an alternative lender.
The downside to having multiple position MCAs is that you can very quickly accrue multiple MCAs with multiple holdbacks at different rates of interest. If your business is in this position, you can seek a consolidation MCA that combines all existing MCAs into one long-term repayment plan.