Merchant Cash Advance – Processing, Pros and Cons

Merchant Cash Advance – Processing, Pros and Cons : A Merchant Cash Advance (MCA) or Business Cash Advance is a loan variety that lends money to companies and start-ups promptly and efficiently. Business financing options, along with short payment terms of generally 24 months and regular compensation, paid on each working day, characterize the MCA. The system opposes the usual larger monthly payments of traditional bank loans and associated longer disbursements terms.

Overall, MCA may be used to describe short-term business loans and future receivables of credit card sales. This type of financing is available to businesses, having stable and continual credit card dealing, including restaurants, retail stores, pharmacies, etc.

How Does A Merchant Cash Advance Work?

The process of getting a merchant cash advance is generally a quick one. The foremost step is the identification check of the business that wants the loan. The documentation needed for it includes:

Government-issued identity proof
Bank and credit card statement processing
Business tax returns

Once the identification approval is processed and done with, it is only a matter of days before the business receives its borrowed amount. Subsequently, they receive a lump sum amount and pay it back through sales generation to customers.

To pay back the loan amount, the borrower offers a percentage of the sales, as specified in the contract, to the lender daily. It may also be done through the connected merchant account, calculated based on sales processed through debit and credit cards. In this case, check and cash sales do not count in the daily quota.

The compensations can also be taken directly from the borrower’s bank account through Automated Clearing House (ACH) payments. By this logic, small-scale businesses with low credit and debit sale rates can also qualify for MCA if they opt for ACH repayments.

Borrowable MCA amounts range from a few thousand dollars to over two hundred thousand dollars. Irrespective of the rented sum, the payback time is usually very brief. In most cases, it is about 18 months or so.

Advantages of MCAs:

MCA has several benefits, some of which are:

Easy Application Process: MCA requires a fast application process, and borrowing money can be done within a day. It’s also easy to qualify because, in this case, the credit history of the loan is less significant than the sales history.
Flexibility: MCAs allow a variety of payment plans and methods and allow borrowers to use the funds as they see fit. Since payments depend on a percentage of daily transactions, debtors do not need to pay back if they have low income. This results in cash flow problems that can lead the business into deeper debt.
No collateral: MCA loans are unsecured, meaning they do not bind the borrower to any collateral. For businesses with limited assets, this feature is a boon.

Disadvantages of MCAs:

Disadvantages of MCAs include:

Potential Cash Flow Problems: MCAs require a certain amount of the borrower’s future sales to be dedicated to repaying the amount borrowed. This results in cash flow being dispensed with which can lead to deeper debt for the business.

Relatively Higher Costs: The cost of obtaining an MCA, as a factor rate rather than an interest rate, is much higher than for many other types of funding. Factor rates are not period dependent, and as such, paying in advance does not help save money.