If a small business needs money quickly, a merchant cash advance could be a helpful solution.
A merchant cash advance (MCA) is a financial product that is an alternative form of business financing. Instead of using typical financing rates, MCA providers take a percentage of daily or, more rarely, weekly sales until you remit the advance. This type of financing has become more popular because of its flexible remittance and quick approval. In fact, merchant cash advance same-day funding is one of the biggest advantages for small businesses.
While merchant cash advances offer some significant advantages, they are also a riskier, more expensive form of getting needed cash for your business. You should know how much it will cost and how it works to determine if it’s worth the risk. Speaking with funding specialist, like the ones at Llama Loan, is essential in finding out if a Merchant Cash Advance is right for you, or if a different funding option suits your business needs.
What is a Merchant Cash Advance?
A merchant cash advance is upfront working capital, that is funded to a business in exchange for future sales and is remitted by having a percentage of your daily or weekly sales go to the funder automatically.
Merchant cash advances don’t have limits to what they are allowed to be used for, which means they can be helpful for taking advantage of time-sensitive opportunities or getting a sum of cash for an immediate need.
Some scenarios where an MCA can be ideal include if the business:
- Needs money quickly to cover surprise expenses or growth opportunities
- Doesn’t qualify for traditional funding
- Is seasonal and has fluctuating sales that could make fixed remittance difficult
- Owner doesn’t have good credit
- Has a lot of debit and credit transactions
- Does not have collateral
To make applying and receiving a merchant cash advance easier, use Llama Loan comparison tools to find an offer that will help grow your business.
Pros of Merchant Cash Advances
- Quick access to capital: MCAs can provide small businesses with access to capital in a matter of days or even on the same day. Most business financing can take weeks or months to close.
- Easy application process: The application process for MCAs is typically much easier, with less documentation required and no credit checks involved.
- Flexible remittance: MCAs are remitted back through a percentage of daily credit sales, meaning the remittances are flexible and can be adjusted based on a business’s sales volume. Businesses that have inconsistent sales patterns can benefit because there are no fixed monthly remits.
- No collateral required: Many small business financing options require collateral. MCAs do not, which makes it a good option for businesses that do not have assets to secure traditional financing.
- Easy qualification: MCAs do not require a credit check, making it a good option for businesses that have poor credit or no credit history.
- Flexible uses: MCA funds can be used for almost anything, unlike some typical business financing that only allows funds to be used for specified purposes.
Cons of Merchant Cash Advances
- Expensive: MCAs are more expensive than traditional financing. Merchant cash advantage rates can be in the triple digits, and fees can add up.
- Lack of transparency: Conditions can be difficult to understand.
- Short remittance period: MCAs typically have a short remittance period of six to twelve months, meaning that businesses need to be prepared to remit the funding quickly.
- Risk of over-leveraging: The ease of obtaining an MCA and the lack of regulation can lead to businesses taking more obligations than they can afford, putting them at risk of financial strain. It’s possible to even default, which could result in a lawsuit or lien against your business.
- Cash flow impacts: As MCAs are repaid through a percentage of daily credit sales, there can be unpredictability in the amount being taken out of a business’s revenue, making it difficult to plan and manage cash flow.
- No credit score improvement: Because a merchant cash advance isn’t technically a traditional finance option, your remittances aren’t reported to credit bureaus.
- No federal regulations: Merchant cash advances are considered commercial transactions, which means they don’t have federal protections like the Truth in Lending Act.
- Limits business decisions: Because of the remittance structure, many MCA contracts have restrictions that limit business decisions like changing the location, business hours or credit processing company.
How to Calculate the Cost of a Merchant Cash Advance
Merchant cash advances don’t use traditional business rates because an MCA is not one of the typical funding options. Because of this, it can be tricky to determine exactly how much a merchant cash advance will cost. You will need to know the factor rate, fees and how to estimate what the equivalent APR would be to compare it to other financial products.
Llama Loan can help you estimate costs as you look for merchant cash advance providers. We will help you evaluate offers to decide which will be the most advantageous for your business with our comparison tools. Get Started Today.
Factor rates
Instead of typical financing rates, merchant cash advances use factor rates. Factor rates are figures in decimal form that show how much you will owe on top of the original funding amount. Factor rates are usually between 1 and 2.
Providers determine factor rates by characteristics like business financials, industry, years of operation, the personal credit score of the applicant and debit and credit sales. In general, the riskier a business looks, the higher the factor rate it will receive.
Fees
Merchant cash advance providers can charge some or all of the following fees:
- Application fee
- Underwriting fee
- Administrative fee
- Bank fee
- Broker fee
- Risk fee
- Origination fee
These fees are deducted from the amount of the cash advance. For example, if you apply for $10,000 and get charted for $1,000 in fees, you will only receive $9,000.
APR comparison
The holdback percentage or retrieval rate is the percentage of sales the provider takes daily. The percentage is typically between 10% and 20%.
To get the best estimate of the total funding cost, calculate the factor rate and fees into an annual percentage rate (APR). To calculate the APR:
- Multiply the number after the decimal point in the factor rate by 365.
- Divided the result by the remittance term
You will likely see that the APR is much higher than with a traditional bank finance option. However, the costs can still be worth it for some businesses. With the help of an MCA, you may be able to profit where you wouldn’t otherwise. Merchant cash advance same-day funding in particular can be worth the high costs if it will give you opportunities for the long-term success of the business.
How a Merchant Cash Advance Impacts Cash Flow
The holdback percentage or retrieval rate is the percentage of sales the provider takes daily. The percentage is typically between 10% and 20%.
Because the holdback is a percentage of daily sales, the actual remittance will depend on how well the business performed that day. This can make estimating your cash flow more difficult.
If cash flow is a struggle for your business, using such as large percentage of your sales could create a negative cash flow. When evaluating if an MCA is right for you, consider how much of your daily sales you can afford to lose.
How to Qualify for an MCA
Merchant cash advances don’t have as many requirements as traditional business funding. Because they are paid based on sales instead of your financial history, even new businesses or owners with bad credit may qualify. The most important qualification is a good sales record.
Each MCA provider will have slightly different requirements, but if you collect most of your cash flow through debit or credit and make a lot of sales, you may be able to get approved.
How to get a Merchant Cash Advance
The process of applying for a merchant cash advance is relatively simple, especially with Llama Loan. All you need to do is supply basic information such as:
- Bank and credit statements
- Business tax ID number
- Social Security number
- Government-issued photo ID
- Business tax returns
After you submit that information, Llama Loan will reach out to multiple providers for you and find the best offers available to you, whether it be a Merchant Cash Advance, or another type of funding option. Remittance generally starts the day after the contract is finalized. Get Started with Llama Loan Today!