The Basics of a Merchant Cash Advance (MCA)
As business owners, there is always a time when we need a little bit of financial help. A merchant cash advance (MCA) is an excellent option for those who need some quick financing help without the hassle of traditional loans. But what are they? Is this better than going to a private business lender? And are they right for your business?
Merchant cash advances are basically loans that can only be repaid with a portion of credit card sales in the future. They can be a quick and easy way to get funding for your business, but they also come with some risks. Here we highlight everything about the MCAs and help you decide if they’re right for your business.
How MCAs Work
Keep in mind that this is not a traditional loan. Instead, it’s an agreement between you and a lender that gives your business access to cash advance funds in exchange for a share of the credit card sales in the future. The amount you receive is based on the average amount of credit card sales your business generates each month, and lenders may also check other factors.
These include your credit score and business financials to decide how much they’re willing to lend. Once you sign the agreement, the lender will typically provide you with the funds within a few days. You repay these advances through daily or weekly automatic withdrawals from your business bank account based on an agreed-upon percentage of the credit card sales in the future.
Advantages and Disadvantages of MCAs
Merchant cash advances can be a great option for businesses that need funds quickly, but there are some drawbacks to consider as well. The biggest advantage of merchant cash advances is that they’re quick and easy to get. Funding can be available within days rather than weeks or months. Plus, they don’t require collateral like traditional loans, so you don’t have to worry about losing your business assets if you default on the loan.
Merchant cash advances also come with a few disadvantages. Most notably, they often come with higher interest rates than traditional loans. Additionally, because repayment is based on future credit card sales, businesses with slower sales may end up paying back more than they initially borrowed. Finally, merchant cash advances may not be the best option for businesses that need long-term funding or want to build their credit history.
The Rates, Fees, and How to Calculate the Cost
The rates and fees of merchant cash advances vary depending on the lender. Generally, you can expect to pay an origination fee (2-5%) and a factor rate that ranges from 1.14 to 1.48. The APR for merchant cash advances also tends to be higher than traditional loans because of the additional fees involved, so it’s important to do your research and compare lenders. To calculate the total cost of a merchant cash advance, you’ll need to multiply the amount you’re borrowing by the factor rate. For example, if you borrow $10,000 at a factor rate of 1.25, your total cost will be $12,500 (10,000 x 1.25).
Merchant cash advances can be a great option for businesses that need quick access to funds without waiting for traditional bank loans. However, be sure to understand the risks and costs associated with merchant cash advances before you make a decision. Calculate the total cost of your loan, compare different lenders, and consider other options to ensure you’re getting the best deal for your business.…