When business owners require immediate access to funds for short-term capital needs, they can utilize their credit card merchant account to secure financing. A merchant cash advance (MCA) offers an alternative to the time-consuming approval procedures and rigid credit standards associated with conventional term loans.

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What is a Merchant Cash Advance?

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A merchant cash advance (MCA) is not a traditional loan but rather a cash advance tied to a business's credit card sales. Small businesses can request this funding and receive deposits into their accounts relatively quickly.

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MCA providers assess risk and evaluate credit criteria differently than traditional banks. These providers analyze daily credit card receipts to determine whether the business can repay the funds promptly. Essentially, a small business "sells" a portion of its future credit card sales to obtain immediate capital.

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Interest rates on merchant cash advances typically exceed those of other financing alternatives and can sometimes be extremely high depending on the provider. Understanding the offered terms is essential for making an informed decision about return on investment.

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How Does a Merchant Cash Advance Work?

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An agreement is established between the business owner and the MCA provider concerning the advance amount, repayment sum, holdback percentage, and advance term. After reaching an agreement, the advance is transferred to the business's bank account in exchange for a future percentage of credit card receipts.

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Daily, a predetermined percentage of credit card receipts is withheld to repay the MCA. This "holdback" continues until the advance is completely paid. Access to the business owner's merchant account eliminates collateral requirements typically needed for traditional small business loans.

Since repayment depends on a percentage of daily merchant account balances, businesses with more credit card transactions can repay advances faster. When transactions are lower on any given day, the withdrawal from the merchant account decreases proportionally. This means that during slower business periods, payback amounts correspond to incoming cash flow.

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Repayment and Loan Costs

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Businesses using merchant cash advances typically repay 20% – 40% or more of the borrowed amount. This percentage is known as the factor rate.

Important: There's a distinction between the daily holdback amount (a percentage of sales receipts) and the total repayment amount for the entire advance.

 

For instance, there might be a 15% holdback with a 30% repayment requirement.

The holdback percentage depends on:

• The amount of funds a business receives

• The expected payback timeframe

• The size of monthly credit card sales

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Example: A business receives a $10,000 advance and agrees to repay $13,000, creating a 30% factor rate. The business agrees to have 15% of credit card transactions withheld until the full $13,000 is collected. With average monthly credit card sales of $14,500, approximately $2,160 would be withheld monthly, and the advance would be repaid in roughly six months.

Typical holdback rates range from 10%-20%, though this varies significantly based on the business and associated risk.

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Is a Merchant Cash Advance Right for Your Business?

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MCAs make sense when businesses need quick capital access to capitalize on opportunities such as discounted inventory purchases, special marketing opportunities, or other short-term capital requirements. Due to less stringent credit requirements, they could benefit businesses with high credit card transaction volumes but imperfect credit histories.

MCAs are viable for businesses needing capital infusion. Unlike traditional business loans, businesses essentially borrow against their own future credit card sales. They're worth considering for short-term, infrequent cash needs covering one-time emergencies or inventory gaps. They're not intended for regular use due to their expensive nature and higher debt risk compared to traditional loans.

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Pros and Cons of Merchant Cash Advances

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Pros:

• Fast capital access: Most payouts occur within a week or less

• Flexible repayment terms: Use funds as needed while meeting designated repayment dates

• No collateral required: Higher approval odds than traditional loans, even with lower credit scores

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Cons:

• Expensive repayment terms: Interest rates typically exceed those of traditional loans

• Credit card sales dependency: Approval based on future credit card sales projections

• No credit score impact: Unlike traditional loans that can positively affect credit scores when paid timely, cash advances have negligible credit score impact

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Terms and Conditions

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The qualifying amount depends on business credit card receipts and other documentation. Merchant cash advances include interest rates that begin immediately upon receiving cash and must be paid according to repayment terms. Beyond interest rates ranging from 17% to 30% or more, MCAs generally require additional fees.

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Eligibility Requirements

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Businesses must accept credit cards during normal operations to qualify for merchant cash advances. The approved amount is calculated based on potential future credit card sales along with required documentation including business credit scores, financial statements, and identity documents.

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Alternatives to Merchant Cash Advances

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When MCAs aren't suitable due to unreachable interest rates, repayment terms, or difficulty determining future credit card sales, business loans or working capital loans serve as viable alternatives. Loans come in various forms through online lenders, traditional banks, or personal contacts, with terms and types varying based on needs and qualifications.

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Application Process

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Approval timeframes for merchant cash advances range from hours to a few days, depending on paperwork and details. Once approved, businesses could see funds in their accounts within 2 days.

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The application process is less complicated than traditional loans, making MCA approval faster:

1. Apply for funding: Complete 1-2 page applications requiring social security numbers, business tax IDs, and business information

2. Provide documentation: Submit months of credit card processing records, bank statements, citizenship proof, and business lease copies

3. Get approved: Approval can occur within 24 hours

4. Set up processing: May require switching to new credit card processors

5. Finalize details: Establish funding terms and repayment schedules

6. Receive funds: Money is deposited into business accounts with automatic repayment beginning.

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Important Considerations

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This financing doesn't build business credit since MCA providers don't report to business credit agencies. Rates can be significantly higher than other financing types and vary widely by provider. Ensure positive ROI before committing.

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Merchant cash advances provide useful resources for business owners needing fast capital infusion with clear understanding of anticipated future receipts for timely repayment.

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