Traditional bank loans are a common source of financing for most businesses, but they come with many restrictions. For example, a “use of proceeds” clause may limit the money borrowed to certain things approved by the bank, such as the purchase of specific inventory or equipment. Merchant cash advances (“MCAs”), on the other hand, have fewer restrictions. The money can be used for whatever purpose the business owners deem to be in the best interest of their business.
MCAs could be an attractive option for some companies, especially those that need capital quickly. Unlike bank loans, which can take weeks or even months to be approved, MCAs can be approved and deposited into business accounts in days or even hours.
In this article, we will go over various questions about MCAs, including what MCAs are, how they work, and the benefits they offer businesses.
What is a merchant cash advance?
MCAs are a type of financing that companies can use to access capital quickly. As an alternative to traditional bank loans, MCAs offer companies an upfront cash lump sum in exchange for a portion of their future sales.
Many business owners looking for traditional bank financing quickly realize that traditional banks are designed to lend money to big corporations – like Ford, GM, Haliburton and Bechtel. Most banks would rather not work with Bob’s Wheel Alignment or John’s Trucking and Transportation. Additionally, traditional banks are often looking for some reason to say “no” to a small business owner. Whether it’s a personal credit history, a lack of reasonable time in business, or an inability to articulate a five-year business plan, banks will list a number of factors in order to consider that a particular candidate is not creditworthy. Therefore, a business owner must often turn to other sources of financing for their capital needs.
How does an MCA work?
MCAs are often confused with loans, but they work quite differently. With a loan, businesses receive an initial sum of money that they must then repay over time, plus interest. MCAs, on the other hand, require a business to sell a portion of its future sales for an upfront cash lump sum. MCA lenders typically charge fees based on a factor rate instead of a traditional interest rate. Factor ratios generally range from 1.1 to 1.5 depending on many factors.
For example, a store that regularly makes debit and credit card payments can apply for an MCA by exchanging a portion of future credit and debit card sales for a lump sum of cash today. Then, each time a sale is made using credit or debit cards, the company will reserve a portion of the sale to the MCA supplier until the full agreed amount is paid. This repayment is based on a percentage of sales, rather than a fixed amount (like a traditional loan), so if sales increase, the MCA is repaid more quickly. Alternatively, if sales drop, reimbursement is delayed. This makes merchant cash advances an attractive option for new business owners who don’t have a lot of collateral or have bad personal credit.
Merchant cash advances can also be fixed withdrawals from a business bank account. These fixed payments can be made weekly or daily, regardless of the company’s turnover. The fixed repayment amount is determined based on historical monthly earnings. This type of reimbursement structure allows businesses that do not use credit/debit card sales to easily calculate how long it will take to reimburse an MCA. For example, a trucking company may need $10,000 to repair trucks during a busy season like Christmas. An MCA lender will quickly give the business $10,000 and charge a 1.3 factor rate to get $13,000 with 16 weekly payments of $812.5. The trucking company is able to fix their trucks quickly and earn $20,000 or more and effectively cover reimbursement and MCA factor rate charges.
What are the benefits of merchant cash advances?
Now that we know what merchant cash advances are and how they work, let’s take a look at some of the benefits they offer businesses and why more should consider getting one over a traditional bank loan.
1. Faster access to capital
One of the most important advantages of MCAs is that they provide quick access to capital. Businesses can request and receive funds in as little as 24 hours, while approval for a bank loan can take weeks or even months. MCAs are an attractive option if funds are needed quickly to cover an unexpected expense or take advantage of a business opportunity.
2. No credit check
Another benefit of MCAs is that lenders do not require credit checks. This means that even if someone has bad credit, they may still be able to get approved for an MCA. This is because the MCA approval process is based on sales history rather than credit rating. Businesses will not be eligible for a bank loan if they or their owners have bad credit, so an MCA could be a good choice for new and small businesses that may not yet have established credit.
3. There is no fixed amount to repay each month
A bank loan works by agreeing to repay a fixed amount each month, regardless of how much income a business generates. This can be difficult for businesses that have seasonal sales or unpredictable revenue. With a merchant cash advance, the amount refunded is based on a percentage of sales, so if sales are slow, businesses don’t have to worry about making a large payment they can’t afford.
4. No restrictions on the use of funds
For bank loans, companies may need to show what they will use the borrowed money for. Loans may not be approved for anything other than business expenses. This is not the case with merchant cash advances, as there are limited restrictions on how the funds are used. Business owners can use the money for anything they deem to be in the best interest of their business, whether it’s buying new equipment, covering unexpected expenses, or even employee bonuses.
5. You don’t need collateral
One of the best things about MCAs is that most companies don’t need to provide warranty. This is different from bank loans where it is necessary to offer some form of collateral, such as a house, car or commercial property, to secure the loan. For companies with little or no assets, exchanging future receivables for cash today is a viable option with an MCA.
6. Lower impact on credit rating
Failure to make fixed amount payments on a traditional bank loan will damage a business’s (and its owner’s) credit rating, making it difficult to get approved for a business loan. coming. Since MCAs are structured so that a company only pays a percentage of its future sales, the impact on the company’s credit rating is less, as the company only repays what is paid. she can afford.
MCAs can be an expensive form of financing and may not be suitable for all businesses, but business owners who need cash fast, want flexibility in product usage, or are worried about being approved for a traditional bank loan may choose a merchant cash advance as an alternative to traditional bank financing.
For more information, contact: Douglas Muir, CEO of [email protected] or visit our website for investor information at www.familybusinessfund.com
Company Name: Family Business Fund
Contact person: Douglas Muir
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Call: (888) 884-6442
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Country: United States