What Is a Merchant Cash Advance?
A merchant cash advance (MCA) provides a business cash upfront in exchange for a percentage of its future sales. It’s an alternative financing option for business owners to get funding without collateral or personal credit requirements. An MCA is also called a credit card processing loan because it’s commonly utilized by companies that accept payments through a business merchant account.
As the name suggests, MCA isn’t a loan but an advance based on a company’s creditworthiness, future sales, and past debit card and credit card sales. When you apply for an MCA, you and the lender agree on an advance amount, a payback amount, and a holdback percentage. The agreed-upon holdback percentage is withheld from your daily sales as payment and the holdback percentage will apply until your balance is paid in full.
The payback amount will depend on a factor rate set by the lender based on their risk assessment of your company’s creditworthiness. The factor rate is inclusive of fees and interest rates; you multiply the cash advance by the factor rate to get your total repayment amount. The higher the rate, the higher you pay.
Repaying an MCA back depends on your daily revenue. Thus, with more sales, you can pay back the advance faster. You’re not obligated to pay more if you’re experiencing low sales but it does prolong the repayment period.
What Types of Businesses Use Merchant Financing?
Merchant financing is best for businesses looking to fund a profitable opportunity to generate revenue, like the bulk purchase of quick-turnaround inventory. An MCA is also a great financing option for companies that are borrowing to expand their operating capacity through the acquisition of machinery or to bring in extra help during peak season. Businesses that utilize merchant financing include:
- Retailers, distributors, and suppliers
- Transportation companies
- Service-based businesses, like hair and nail salons
- Bars and restaurants
- Specialty trades
- Auto repair shops
An MCA is a great option for businesses that process a high volume of credit card transactions. Before taking on any business financing, make sure you understand the costs associated with your loan. In addition, ensure you have enough cash flow to make payments, especially since an MCA needs to be paid back daily.
5 Things You Need to Have for Merchant Financing Approval
The application process for merchant financing is quick and easy — far from the complicated and long process of traditional small business loans. Once your financing is approved, you can typically receive the money in your bank account within one to two business days. Check out the requirements below to determine if you can get approved for an MCA.
To get started, fill out an application online or call Clarify Capital at (877) 838-3919. You’ll then be matched with a dedicated adviser who will walk you through the entire process. Here are the general requirements and documents we may request:
- Your Social Security number or employer identification number (EIN)
- Bank statements, credit card statements, or payment processing data from the last three months
- Tax returns
- Financial statements, such as a balance sheet or a profit and loss (P&L) statement
Length of Time in Business
Loan providers use the length of time you’ve been in business to assess your creditworthiness and their risk of not getting paid. An established business typically translates to lower risk on their part. To qualify for a merchant financing loan, most lenders require that you’ve been operating for at least six months.
Lenders look at your monthly income to determine if you have the cash flow to pay them back. They also use it to calculate your loan amount. Most MCA providers ask that you have at least $10,000 in monthly revenue. Obviously, if you’re bringing in more than the minimum requirement, your chance of getting approved for a larger amount is also higher.
Your credit rating represents your payment history, the amount of debt you have, and the length of your credit history. As a business owner, you should continually monitor your personal credit score because it’s one of the factors lenders check whenever you apply for loans.
At Clarify Capital, we look at each client holistically to determine eligibility, and we provide funding to applicants with good and bad credit scores. This is why you might be eligible for an MCA if your credit score is at least 550. Strive to have a higher credit rating, though, because it typically helps borrowers get better interest rates and repayment terms.
The debt-to-income ratio is a metric used by financial institutions like banks to compare the amount of debt you have against your overall income. MCA companies use the debt-to-income ratio to measure and calculate what you can reasonably afford to pay. As a result, someone with a lot of debt is usually considered a riskier applicant. Ideally, lenders want borrowers to have a low debt-to-income ratio because it means they’re more likely to make their monthly payments on time without difficulty.
Best Cash Advance Funding Alternatives
Whether an advance loan is right for you depends on your unique business goals and preferences. We’ve outlined the most popular business financing solutions below for owners who want to explore other options:
Term loans are a good fit for owners who want predictable and regular payment schedules. You receive a lump sum of money and pay interest on the total amount financed. Unsecured loans do not require collateral.
Commonly referred to as invoice financing, factoring works similar to MCA loans. The key difference here is that the funds you receive are based on account receivables, rather than merchant sales.
Business Line of Credit
Credit lines provide flexibility and maximum control. You only pay interest on the capital you use, rather than the total amount you’re eligible to receive. Owners can draw from an available pool of funds on an as-needed basis, as things come up.
Equipment financing makes sense for business owners who need to buy or rent machinery and equipment. Borrowers with bad credit can be approved. These loans do not require down payments or collateral.
Grow Your Business With Merchant Financing From Clarify Capital
The main advantage of a merchant cash advance is access to quick and easy financing without giving up personal or business assets as collateral. This is because MCA lenders emphasize past credit card sales and future sales. With an MCA, you’re also not restricted with how you can use the funds you receive.
Cash advances are an excellent funding option for small business owners who need capital but who may have less-than-stellar credit ratings. Apply today to determine if you qualify for a merchant cash advance with Clarify Capital.