post by:
Michael Goldstein
You have probably heard of multiple ways to finance your business. Scaling, growing, and expanding are how you generate more revenue and reach new and lasting customers. In order to do that, you need to find a way to secure a larger amount of inventory while still financing all of the additional costs that tie into the supply chain. There are a few options you can choose from, including traditional lending. However, merchant cash advance is more flexible and beneficial for eCommerce sellers. Let’s explore the ins and outs of merchant cash advance.
What is Merchant Cash Advance?
Almost every article will tell you a merchant cash advance is not really a loan – and that’s true. In the sense that you are borrowing money for capital and are required to pay it back, yes it’s a loan. But the method of repayment is more elastic than traditional term loans or lines of credit.
When you borrow capital from a merchant cash advance, the repayment process is through a daily percentage of your debit/credit card or online transactions. This helps eliminate cash flow problems you may encounter while scaling and growing your business.
Who is Eligible for Merchant Cash Advance?
Any business – start-up, small, or large corporation – is eligible for a merchant cash advance. However, there are a few requirements that lenders generally look for:
- 6 months or more in business
- 3-12 months of credit/debit card transactions
- 40%+ of your revenue received through credit/debit card transactions.
The ideal candidate for merchant cash advances will have a large chunk of their payments received through a credit card processor, a business bank account, and at least one year of tax documents (even if you have not been in business for the entire year). Minimum revenue amounts vary drastically between MCA lenders. Businesses can earn just a few thousand in revenue each month or hundreds of thousands of dollars. There is something for every level of eCommerce selling.
Benefits of Merchant Cash Advance
Merchant cash advances come with the peace of mind of acquiring capital while making small repayments based on your sales. Here are a few additional benefits of merchant cash advances:
1. More businesses qualify for MCA than traditional loans
Here is the cold, hard fact: less than 20% of small businesses will be approved for a bank loan. The restrictions are tight and banks usually require at least a year of revenue history and tax documents. Once you secure a bank loan, the interest is usually competitive – meaning you might luck out and get a good APR.
On the other hand, around 85% of small businesses are approved for merchant cash advances. Merchant cash advances usually require less time in business, fewer months of revenue history which opens up qualifications for more small businesses. These factors combined make it easier to see why more small businesses choose a MCA over a traditional loan.
2. No personal collateral
Unlike traditional loans or many other types of financing, merchant cash advances do not require a personal guarantee. Your personal assets, as long as they are separated from your business, are safe and cannot be collected upon in the event of a default.
In other lending situations, small business owners have lost their house, their car, and their retirements or personal bank accounts due to failure to pay. And you can imagine the further consequences that follow. With an MCA, you can focus solely on your business without running the risk of losing personal assets.
3. Fast and easy funding
Most applications will ask for proof of identity (government issued ID such as drivers license or passport), 1-2 years of tax statements, 3+ months of business bank statements showing credit/debit transactions, and a voided check (or routing number and bank account number) for the daily deductions. Once you have this information, applications are quick to fill out. Approval and funding can be as fast as the next business day!
4. Easy repayment
You never have to think about manually making payments as the withdrawals are made automatically from your business bank account.
Drawbacks of Merchant Cash Advance
1. Credit check may be required
While MCA’s do not focus solely on credit, a credit check may be required. More often than not, the lender is looking for credit/debit transactions. MCA’s are still available and offered to businesses with little or poor credit history.\
2. High factor rates
Instead of interest rates, MCAs use a factor rate. Factor rates work similar to interest – a percentage is applied on top of the principal loan amount. However, unlike traditional loans, you cannot pay off the debt sooner to decrease the amount of interest. This means you will likely see a high APR based on how quickly you repay the MCA.
Factor rates are applied as 1.1-1.9 times the original loan and you are required to pay the total amount before your total debt is repaid. If you receive a $100,000 MCA at a factor rate of 1.5, your total repayment amount is $150,000. The good news is that this number does not fluctuate and you can see your total repayment amount before you accept the MCA. This final amount may not include taxes or fees.
3. MCAs are not federally regulated
MCAs are considered commercial transactions – the same as when your customer buys a product or service from your website. Since they are not considered “loans” there are not many government regulations or laws that MCA lenders have to abide by.
That’s not to say that MCAs are left completed unchecked. MCAs fall under the Uniform Commercial Code (UCC) which is essentially a code of conduct and state laws relating to commercial transactions.
Conclusion
Merchant cash advances are a flexible, fast, and reliable way to acquire the capital needed to grow your business. While they are not the only financing option out there, MCAs offer a lump sum or steady stream of cash flow to take the weight off of sellers’ shoulders.