There are many options available in the wide world of small business financing, each with its own set of terms, conditions, and technical terms that can occasionally feel overwhelming. A recent update to this list of options is the Merchant Cash Advance (MCA). However, what is an MCA exactly, and how does it operate? We’ll explain the fundamentals of merchant cash advance in plain English in this guide so you can decide if it’s the best choice for your company.

What is a Merchant Cash Advance?

Think about yourself as a small business owner in need of capital to grow your company or pay unanticipated expenses. Standard bank loans can look unaffordable because of their demanding credit requirements or extended approval processes. A merchant cash advance can help in this situation.

An MCA is simply a type of financing where a lender gives a company a one-time payment in return for a percentage of the company’s future credit card sales. The business agrees to repay the advance plus a fee by allowing the lender to collect a portion of its daily credit card transactions until the debt is paid off, as compared to repaying the loan in fixed monthly instalments.

How Does a Merchant Cash Advance Work?

Let’s break down it using this example:

Let’s say you run a small café and you need to raise the money to expand your outdoor seating area and buy new equipment. You need $20,000. You choose to submit a merchant cash advance application.

Upon examination of your company’s credit card sales history and overall financial standing, the MCA provider extends an offer to you for the necessary $20,000 in total. You agree to pay back the advance plus a 20% fee in exchange, which means you’ll have to reimburse $24,000 in total.

This is the point where things start to get interesting. Until the $24,000 is entirely paid back, the MCA provider will take a tiny portion of your daily credit card sales in lieu of fixed monthly payments like you would with a traditional loan. This implies that you will repay more during times of high demand and less during periods of low demand.

Pros and Cons of Merchant Cash Advance

Pros:

  1. Accessibility: Because MCA is primarily dependent on your company’s sales history rather than your credit score, and frequently simpler to qualify for than traditional bank loans.
  2. Fast Funds Access: Compared to traditional loans, MCA applications are usually processed more quickly, giving you quicker access to the money you require.
  3. Flexible Repayment: Because repayments are based on a portion of your credit card sales each day, they change in line with the income of your company and offer some flexibility when things are slow.

Cons:

  1. High Cost: Compared to traditional loans, MCA frequently have higher fees and interest rates, which makes it a more costly source of funding over time.
  2. Possible Cash Flow Problems: Your cash flow may be hampered by the daily repayment schedule of MCA, particularly in slower months when sales are lower.
  3. Danger of Debt Cycle: You run the risk of getting caught in a debt cycle if your company can’t make enough money from credit card sales each day to pay back the balance.

Is a Merchant Cash Advance Right for Your Business?

Several factors, such as your cash flow, the advance’s cost, and your repayment capacity, will determine whether or not a merchant cash advance is the best option for your company. Here are some things to think about:

  1. Can You Pay the Price? identify whether your company can afford to repay the full cost of the MCA, including fees and interest, without placing an excessive burden on its finances.
  2. Are Credit Card Sales a Consistent Stream for You? Repayment of MCA is made up of a portion of your daily credit card transactions, so being able to maintain a consistent flow of sales is essential to meeting your repayment obligations.
  3. Have You Looked Into Other Choices? Check if you have more affordable options before committing to an MCA by looking into alternative financing options like conventional bank loans, credit lines, or Small Business Administration (SBA) loans.

Conclusion

Small businesses in need of immediate cash can find great value in merchant cash advance, but there are some disadvantages as well. It’s critical to carefully consider the benefits and drawbacks of an MCA before deciding if it’s the best option for your company’s objectives and financial needs. Recall that securing the long-term viability and prosperity of your company depends on you making well-informed financial decisions.