Should You Consider a Merchant Cash Advance?

Should You Consider a Merchant Cash Advance?

Merchant cash advances can help your business if you’re struggling with cash flow.

  • A merchant cash advance is a funding option for businesses suffering from cash flow issues.
  • You’ll receive a one-time, lump-sum payment and then repay the funds with a percentage of your sales over time.
  • MCAs are a good option for businesses that don’t qualify for small business loans or need funding immediately.
  • This article is for any business owner dealing with cash flow problems.

If your business is suffering from cash flow issues, you’re not alone. In fact, according to a survey from U.S. Bank, 82% of small businesses fail because of cash flow problems. Cash flow issues happen when your monthly expenses exceed the amount of cash you have on hand. The cause might be slow sales or customers falling behind on payments. Poor cash flow hurts your ability to invest in your business and affects your daily operations.В

If you’ve been dealing with cash flow issues, maybe you’re considering some type of small business funding. In some cases, a merchant cash advance is a useful option. But be careful: MCAs are expensive, and they aren’t federally regulated.В

What is a merchant cash advance?

A merchant cash advance (MCA) allows you to cover temporary cash flow problems with future sales. You’ll receive a one-time, lump-sum payment and then repay the funds with a percentage of your sales over time.

An MCA could be a good option for businesses that process a high volume of credit card transactions and need fast access to cash. If your business doesn’t accept credit card transactions, an MCA won’t be an option for you.В

Did you know? With MCAs, you’ll receive a lump-sum payment that you’ll repay with a percentage of your sales. Learn all the differences between a business loan and merchant cash advance.

How does a merchant cash advance work?

Applying for and receiving an MCA is a relatively quick process. The amount you’re approved for will depend on the volume of your daily credit card transactions.В

You could receive anywhere from a few thousand dollars to over $200,000, and you might be able to access the funds in just a few days. However, the repayment terms are typically short, often less than 18 months.

The cost depends on the amount you receive and your factor rate, which ranges from 1.1 to 1.5. Your business’s financial strength determines your factor rate. A better credit score translates to a lower factor rate.В

For example, let’s say you receive an MCA for $100,000, and your factor rate is 1.2. That means you’ll owe $120,000 in total.В

Your lender will take a percentage of your daily credit card transactions until funds are repaid. This percentage is known as the holdback rate, and it usually ranges from 10% to 20%.В

Most lenders deduct these funds from your account automatically. The repayment terms are based on a percentage of your daily sales, so you won’t find yourself in a financial bind if sales suddenly slow down in your business.

When should you use a merchant cash advance?

Although MCAs don’t have the best reputation, there are times when taking out one could be the right choice for your business. For instance, they can be a good option for businesses that need fast access to cash but don’t qualify for a loan from the bank.

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Even if you do qualify for a loan, you may need immediate access to funds. MCAs are processed much faster than small business loans and come with minimal paperwork.В

Overall, MCAs are a good option for businesses that need fast funding to cover short-term expenses. If you run a seasonal business, need to cover temporary cash flow issues, or pay for a one-time business expense, an MCA could help.

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