Some Top Advantages of a Merchant Cash Advance Loan

Small businesses often find themselves in a cash crunch. There are very few options in such instances. One can try to borrow money from friends or relatives but there is always a question mark. There are loan sharks but it is risky. There are other options for the immediate supply of cash without any collateral.

Merchant cash advance is the best solution for small businesses like hotels, restaurants, professionals, retailers and even small manufacturers. It is a straightforward deal and one is never beholden to friends or relatives. It is cash on demand, no questions asked. The process is relatively simple and there are minimum eligibility criteria making is the best source of funding for small business owners. There are inherent advantages and the cons are only a few. Consider the advantages of a merchant cash advance loan.

Fast approval, fast disbursal

If cash is needed urgently there is no better source than this. One only need to apply online, submit a request and then the process is taken forward. Applicants usually receive cash in their bank account within 4 days of making the request provided every other requirement is met.

Minimum paperwork

Unlike banks and other lending institutions that ask for a lot of documentation, this method of funding is the easiest when it comes to paper work. One needs to submit only the bank statement for the past six months, proof of ownership of business and proof of identity and residence. That’s that.

Best for people with bad credit

People with bad credit can find themselves in a jam with no one willing to even consider their request for temporary funds to overcome their difficulties. If they go down this road, it is a reprieve and they can really get back on their feet. More to the point, their credit rating can improve with assistance from the right lenders.

Best for businesses that wish to expand or launch campaigns

Traditional lenders may insist on a solid project report to show why borrower needs funds, how they will use it and how it will help them generate revenues. Small business owners rarely have the resources or wish to pay a chartered financial specialist to prepare such papers. Going this way helps them get their hands on cash that will help them expand the business, buy equipment, modernize, give their retail store a makeover or launch periodic campaigns to rope in customers.

No collateral

One of the finest advantages that borrowers like is that there is no need to submit any collateral or guarantee. Just their personal word is sufficient to help them get their hands on sorely needed cash.

Easy repayments

MCA repayments are usually tied as a percentage of the daily credit card sales. One can just as well opt for a fixed monthly repayment. In the former case, the repayment amount is low if sales are slow and higher if the sales are high. In any case, repayment extends over one year and by that time the borrower may have used the money wisely to increase revenues.

Cons

The only cons are that the factor rate is high ranging from 1.2 to 1.5 that translates to the interest rate of 20% to 50%. But then, a non-secured loan is always expensive. Another factor is that the business should have been in existence for at least a year or so with a minimum turnover of $ 10000. These are minor niggles.

The MCA advantages far outweigh the minor cons.

Defference Between a Small Business Loan and A Merchant Cash Advance

Business Loans

A business loan goes through an underwriting process that can take a few weeks before you are notified if you are approved or denied. Depending on the loan size, the funding bank will need certain documentation such as personal tax returns, business returns and financial statements. The underwriting process will determine if the business or business owner has a good credit history and the ability to pay back the loan which will involve a personal guarantee from the business owner. Usually there will be a stipulation that the business can’t open up any new debt during the term of the loan.

Repayment Terms

A business loan will usually have a maturity or payoff deadline of 3 to 10 years and the interest rates are usually fixed. The payments however can be amortized over a longer period of time making the payments more affordable. In this case, the loan will have a balloon payment due at maturity so the business owner will want to make sure they have a plan to payoff this balance at maturity or they may have to request a renewal or extension.

Collateral

Depending on the loan size, the bank may require collateral which can be in the form of property or assets. This can include real estate if they own the property, business assets and in some cases accounts receivables.

There are express type loans with loan amounts up to $50,000. These are usually based on the owners credit and personal guarantee and do not require collateral. Since it is unsecured, rates are usually higher and can come in the form of a revolving line of credit or a fixed term loan. The processing of these types of loans can be done usually within three to five days.

Merchant Cash Advances

A merchant cash advance can be processed much quicker and may be more convenient depending on the need for the funds. Since these types of loans are based on credit card volume, the business owner must have a merchant account for credit card transactions. Usually an approval can be done within 24 hours and since the documentation is limited, can fund within 72 hours. In some cases a business owner will use a merchant cash advance as a bridge loan while they are in the process of a business loan application.

Repayment Terms

A merchant cash advance is a short term solution for funds needed for business purposes such as inventory, expansion, upgrades or temporary cash flow. The repayment terms are based on a factor rate depending on the term of the loan. This loan will also have a balloon payment so the business owner will want to have a plan to payoff the note or will have to renew the loan.

Collateral

These types of loans base their approval on the monthly volume the business owner does in monthly credit card transaction. The collateral is basically the business owner agreeing to use future credit card sales for the repayment of the loan. Documentation is limited so this type of financing can fund quicker than a traditional business loan. Typically there is no personal guarantee and will not effect the business owners personal credit.

Disadvantages Of Merchant Cash Advance Loan

Merchant Cash Advance (MCA), also called business cash advance, brings reprieve to various businesses that do not get approved for loans because of their riskiness, poor credit score, lack of acceptable collateral, or newness in the industry. With all the advantages that MCA brings, business owners would still prefer a loan or a credit line. This is because the interest rates charged by MCA providers can amount to 30%-200% APR – an ill affordable cost for any commercial enterprise.

Selling points for merchant cash advance

MCA providers are at pains to convince customers that business cash advance is not a loan. It is a purchase of your future credit card sales. Therefore, it does not involve the rigmarole of acquiring a loan. The advance gets transferred to your account in a week or so; there’s no collateral; the retrieval rate is a percentage of your monthly sales, therefore it fluctuates with the business revenue; no pressure; minimum paperwork; and high approval rates.

At the same time, there’s also high retrieval rate, short term of retrieval (typically 9-12 months), and in many cases a contract that is as broad as it can get.

Merchant cash advance – is it a sugar coated pill?

Business owners who have no financing options apart from MCA realize soon enough the hole the advance cuts into their income. While some ethical providers are working to keep the industry clean, there are those that leave very little for a business to fuel growth. Retrieval rates purported by reputed providers are less than 9%; even as low as 1% for low-margin businesses. However, many businesses have to pay up as much as 30% as premium on the money that is advanced to them.

Another significant drawback of MCA is the ambiguous contract between provider and customer. The terms could be so broad that a business becomes liable to breach for making even the smallest changes to her business model. Providers skirt this charge by claiming they foot the loss if the business goes under. However, this by no means reduces the risk for the customer.

The fact that MCA is not a loan is also its greatest risk as it is not regulated by the laws governing loaning institutions. This gives providers a lot of leeway. The contract is your only safe hold, making it doubly important for you to understand it completely.

What is the way forward for MCA industry?

The MCA industry has been growing in spite of its high cost. The industry leaders recognize that the swindlers in their midst will not only bring disrepute to the profession but will also evoke the attention of regulators. They have joined efforts to form the North American Merchant Advance Association (NAMAA) to bring some order into the industry. NAMAA has published guidelines for customers to protect them from unsavory providers.

It is not viable for all kinds of businesses to get finance from conventional sources. For them, MCA is an option that though costly is the only one available. Third-party brokers often showcase MCA as a godsend for hard up businesses. However, it is critical to understand its disadvantages before taking it on. In fact, professional MCA providers themselves want to be perceived as a funding source for growth rather than deliverance.