If you’re seeking funding for your small business, a merchant interest rate payday loans Nelsonville Ohio cash advance (MCA) may be the solution to your problems. MCAs are used widely as an alternative to traditional loans. They’re an option for business owners who want to avoid the lengthy approval processes and strict credit requirements that come with most traditional bank loans.
Of course, all funding options such as loans, revolving credit, and cash advances have their specific advantages and disadvantages. It’s a good idea to fully understand what you’re getting into before you choose to commit to a merchant cash advance, or any other type of funding.
In this guide, we will walk you through everything you need to know to make an informed decision about MCAs. We’ll cover why a merchant cash advance may (or may not) be right for you, how it works, the requirements for getting an MCA, the application process, and the pros and cons of using MCAs. It’s important for us to mention that many firms offer MCAs; rates, terms, and limitations will vary from lender to lender.
What is an MCA?
MCAs are financial products, not to be confused with loans. An MCA is when a lender purchases a percentage of your future credit card sales. When you apply for an MCA, the lender will look at the credit card receipts of your business to determine if you have the capacity to pay back funds based on your daily credit card sales.
A merchant cash advance agreement with a lender means signing a merchant cash advance contract. The fees will be included in the contract along with their methods of collection. The contract will typically state no fixed date of repayment since the advance is only considered paid once the principle and predefined interest are fully collected. Some contracts will go into detail about the screening process the lender uses to determine eligibility.
How does an MCA work?
The advance amount is the lump sum you receive when MCA is approved. The funding amount is based on your business’s financial strength.
The payback amount is the amount that the business owner must repay. It is calculated based on the amount funded plus fees called a factor.
The holdback is an agreed-upon percentage of the daily credit card receipts which are withheld to pay back the MCA.
The amount that you are eligible to advance will depend mostly on your average credit card sales. Depending on how much you need and how much the lender decides you are qualified for, the MCA can be as little as 50% of your monthly sales or all the way up to 250% of your monthly sales.
To repay the cash advance, a small percentage is calculated and is taken with each credit card sale over the repayment period. The agreed upon percentage is called a “holdback.” The lender withholds that amount each day, until the cash advance is paid back in full.
The holdback is also referred to as the “retrieval rate,” and it can be anywhere between 5% and 20% depending on the lender, the amount of your advance, your daily credit card sales, and the agreed repayment period. The advance amount will also determine the term or repayment period which can be anywhere between 90 days and 18 months.
If your business is doing well and receives more credit card transactions, you’ll repay the advance sooner. And because repayment is based on a percentage, in the event that your sales are low on a certain day, the amount taken from you is relative to your incoming cash flow.