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Comparing merchant cash advance companies can be a complex task. There are so many different factors to consider and a lot of small print to read. But it’s important to do your homework in order to get the best deal for your business. Because the right merchant cash advance (MCA) can improve your cash flow and give you access to much-needed funds, even if your credit history is less than ideal.

An MCA is an advance on revenue that your business is going to earn in the future. It’s a smart funding solution for companies that have a steady flow of income but need to access a larger lump sum up front. Unlike a traditional small business loan, repayment is taken directly from credit card sales that you generate so that you don’t need to make additional payments.

How Do Merchant Cash Advances Work?

Merchant cash advance companies provide funding to businesses that generate credit and debit card sales. These funds are an ‘advance’ on the revenue that a business is predicted to produce in coming months. The business receives a lump sum at the beginning of the term and then repayments are automatically made using a small proportion from credit card transactions. This allows organizations to benefit from a cash injection when they need it, safe in the knowledge that it’ll be paid back hassle-free.

MCA Repayment Options

A range of repayment options are offered by different merchant cash advance companies. The most common are known as ‘split withholding’, ‘ACH withholding’, and ‘lock box withholding’. Here’s a brief overview of these repayment systems;

  • Split withholding – your credit card processing company automatically deduct payments from your merchant account and transfer them to the MCA lender.
  • ACH withholding – short for ‘automated clearing house’, this involves repayments being automatically deducted from your business checking account.
  • Lock box withholding – also known as ‘trust account’ withholding, this is where credit card sales are held in an account by the MCA company who then deduct the payment and transfer you the rest.

As well as looking at the systems, it’s also important to understand the repayment structures that are offered by different cash advance companies.

  1. Sale structure – A pre-agreed percentage of your card sales is deducted as a repayment towards your cash advance, allowing your payments to adapt in line with your revenue.
  2. Loan structure – A fixed repayment amount is determined in advance and does not fluctuate dependent on card sales so you know exactly how much you’ll be repaying each month.

Whichever type of repayment option you’re offered, it’s common to find that you’re not obliged to pay the balance back if your business goes under. This is another point of difference from other types of lending such as a commercial mortgage or short-term loan.

How Much Do Merchant Cash Advances Cost?

The main cost involved with an MCA is the interest, which is commonly referred to as the ‘factor rate’. Some merchant cash advance companies will also charge an origination fee too so it’s important to understand all of the fees before committing. Factor rates can vary substantially so it’s worth looking at several options to ensure you get the best deal available. If you’re offered a factor rate of 1.2 then you’ll have to repay 1.2x the amount you borrow, which is the equivalent of 20% interest. For example, a $10,000 advance with a factor rate of 1.2 would mean that you repay $12,000 in total. This equates to $2000 in interest charges.

Benefits of MCAs

There are many benefits to choosing merchant cash advances over other types of funding. They can be used for a wide range of business purposes, including equipment repairs, expansion plans, additional temporary staff, or marketing activities. The application process is fairly straight forward and it’s also easier to qualify for businesses that have a poor credit score.

The simple application process means there’s often a fast response from online lenders and you can access the funds quickly (although traditional banks may still take a while to respond due to their complex infrastructure). This is ideal for businesses that are short on time and need funds to be deposited as fast as possible. There’s also less paperwork involved than a small business loan or line of credit, making it a practical option for busy business owners.

Most merchant cash advance companies don’t require collateral to be tied to the borrowing. This means you don’t need to put up assets such as your house or car when applying for the funds. For many business owners, this provides peace of mind that they’re personal possessions aren’t at risk if the business unexpectedly has a bad year.

Another key benefit of MCAs is that you don’t need a perfect credit history to take advantage of them. As long as you can demonstrate a steady income from card sales then you should be eligible for this type of short-term financing. This makes it an attractive option for businesses that would struggle to be approved for traditional loans.

Drawbacks of Merchant Cash Advances

Merchant cash advances can also have some disadvantages when compared with other funding options. They won’t help you build up a credit score because they aren’t reported to credit agencies. If you’re a new start-up and plan to acquire financing in the future, then MCAs won’t contribute to your credit history.

Some merchant cash advance companies also charge particularly high interest rates for their products. A factor rate of 1.3 is the equivalent of 30% APR (depending on the duration of the repayment term) which is more expensive than most credit cards or loans. However, our factoring rates start at 1.12 so there are good deals available for those who know where to look.

Ideal MCA Uses

Here are some situations where working with merchant cash advance companies may be a particularly helpful solution;

Seasonal Sales

If your sales are affected by seasonality, then a merchant cash advance can adapt with your income. During busier periods you’ll repay more as a result of increased credit card sales. But as customer numbers decline, you’ll also make fewer repayments. This gives business owners a flexible funding option and doesn’t tie them to fixed repayments that may be trickier to fund during quieter periods.

High Credit Card Sales

If you mainly receive payments in the form of cash, then a merchant cash advance may not make much sense. But if you have a high proportion of sales that are paid for via credit card, then an MCA can be an excellent way to capitalize on this. The greater your card revenue, the more confident you can be in repaying the advance quickly using daily credit card deductions.

Merchant cash advances are practical funding options for short-term needs but aren’t ideal for the long-term. They can give you the working capital to address immediate business needs and allow for convenient repayment through credit card sales. The flexible nature of MCAs allow payments to adapt in line with your income, so you won’t be caught short during quiet periods. Since there’s no collateral needed you can also sleep easy knowing that your home isn’t at risk.

How We Can Help

Strategic Capital is one of the leading merchant cash advance companies in the USA and supports organizations across the country. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business financing solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.
Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts.
Our clients receive cash in advance of payments from their customers, typically within 30, 60 or 90 days, providing needed capital to meet operational overhead. Unlike other types of financing, AR financing focuses on your sales, not your balance sheet. As sales increase, more working capital becomes available to meet the demands of operating your business. AR financing provides a continuous, long-term source of funds on a short-term basis. Learn more about our merchant cash advance services here.

– Bradley Keys

Checking for pre-approval will not affect your credit score.