Merchant Cash Advance – Good Option of Quick Cash for Businesses
While reopening the business after the COVID-19 lockdown, business owners may need quick access to cash to pay out the pending bills as the pandemic has reduced cash flow for almost all businesses. Applying for small business loans is a good option. However, the approval process may take long and you need the cash as quickly as possible. In such a case, merchant cash advance may be a better alternative.
What is a Merchant Cash Advance?
MCA or merchant cash advance is technically not a loan, but actually a cash advance based on the credit card sales of your business. So, you can apply for a MCA and get an advance deposited into your account quite fast.
Just like providers of business loans, providers of MCA too evaluate risk and weigh credit criteria. However, they do this a bit differently. They check the daily credit card receipts to determine if the business could pay back the funds on time. Thus, primarily a small business “sells” a part of future credit card sales to get the quick cash.
An interest is also charged on merchant cash advance, but the rate is normally higher than other loan options. Therefore it’s advisable to study the terms and conditions carefully so that you can make an educated decision about the ROI.
How does a Merchant Cash Advance Work?
A merchant cash advance works by an agreement that is made between the provider and the small business owner that has clauses regarding the advance amount, payback amount, holdback and terms. Right after the agreement is made, the bank account of the business gets the advance deposited in exchange of a future proportion of credit card receipts.
Every day, the percentage of the daily credit card receipts that has been agreed upon is withheld to pay back the MCA. This is known as the “holdback” and it continues till the advance is fully repaid. The access to the merchant account of the business owner eliminates the need of collateral for a traditional small business loan.
Since repayment is based on a proportion of the daily balance in the merchant account, the more the credit card transactions a business performs, the quicker the advance is repaid. Should transactions be lower on a particular day, the draw from the merchant account will also be lower. Thus, when your business is slow, the payback will also be slow, relative to your incoming cash flow.
Also, there is another alternative for the repayment of loan called Automated Clearing House withdrawals, which is good particularly for businesses whose sales don’t mainly come from credit or debit cards.
Merchant cash advance is a very good option to get quick cash for business provided you use it sensibly and carefully. Go through all the terms and only then decide whether this option is good for you. All the best!