Although they may seem like traditional loans, merchant cash advances are a unique and effective financing alternative for businesses that have steady income streams. Unlike loans, which provide companies with a lump sum and a set repayment term, merchant cash advances offer a more flexible solution by working on as needed basis, and featuring daily repayments that help keep costs from ballooning. With merchant cash advances, businesses can guarantee that they will always have cash on hand to cover operational expenses without dipping into their reserves.
Merchant cash advances—also known as MCAs—work differently from traditional business loan providers ,giving them more flexibility along with the capability of disbursing funds much faster than other financing alternatives. Merchant cash advances are forwarded to businesses against a percentage of their future sales, similar to how invoice factoring operates. The major difference is that invoice factoring is used exclusively with invoices that are set to be paid. MCAs instead are designed for industries that have steady income streams, such as restaurants, retail stores, and service companies that usually process a substantial volume of credit card sales.
Unlike loans, MCAs involve the selling of future income to the lender in exchange for funds in the present. Normally, a lender and business will agree on how much money will be advanced, the rates and fees attached to the advance, and how long the advance duration will last – terms usually last less than 12 months. Once funds are disbursed to the company, repayment is automated by holding back a percentage of daily credit card sales until the advance is paid in full. Since customers can pay with their credit card receipts, collateral is not necessary for approval. Moreover, this system also means that MCAs have lower qualification requirements, helping small and medium-sized businesses find the financing they need without having to pledge major assets as collateral.
As with most other forms of financing, merchant cash advances can be incredibly useful when used properly. MCAs are used to cover expected shortfalls in everyday cash flow, and for that reason, are more useful for covering normal overhead expenses than they are for major equipment purchases, expansions, hires, and other similar uses. Before applying for a merchant cash advance, businesses should ask themselves the following questions:
The application process for a merchant cash advance is fast, painless, and in many ways much more straightforward than the process that accompanies other forms of financing. Because it is not a loan, a merchant cash advance application skips some of the steps traditional financing requires. These are the general steps needed to apply for a merchant cash advance (keep in mind that the specifics may vary from lender to lender):
1. Apply for Funds: This is the initial step, where businesses must fill out an application that covers questions regarding income, revenues, and other financial details about the applicant. In addition, companies must enter identifying information such as a social security number, business tax identity number, and other relevant contact details.
2. Submit Documentation: Once the initial application is completed, businesses are asked to submit documentation to prove the answers given in their application are accurate to determine if a company is eligible for financing or not. Some of the documents required in this step include, but are not limited to credit card processing statements, bank statements, proof of residency or citizenship, identification, and copies of lease agreements.
3. Receive Approval: The length of this step may vary from business to business, as well as between lenders. In most cases, however, the approval process for a merchant cash advance takes as little as 24 hours.
4.Close on Advance Terms: Once approved, the borrower and the lender will finalize the terms of the loan, including the discount rate, the final amount to be advanced, and more.
5.Receive Financing: Once finalized, business owners will receive their funds in short order. In most cases, this happens swiftly after their agreement terms have been finalized.
Another crucial step when working to identify the right funding solution is to ensure that the merchant cash advance selected is the best potential financing option available. Before selecting a solution, companies should answer the following questions:
Finding the right financing solution for a business, especially a small business ,can be a tricky affair, but selecting a merchant cash advance can solve many problems other financing solutions pose. For those businesses that have steady income but require a little more cash flow to truly take off, a small merchant cash advance is an excellent way to supplement short-term capital and get the lift needed to expand. Moreover, businesses that are revenue-heavy but have less-than-stellar credit can benefit from the simple structure of merchant cash advances and the friendlier approval requirements. Before selecting a merchant cash advance, discover our expert reviews and find the solution that best fits your business needs.
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