A Straightforward Guide to Merchant Cash Advances for Small Businesses

person holding a credit card

Running a small business is a huge accomplishment and every year, more than 627,000 business owners open their doors for the first time. No matter what industry they work in or what types of services they provide, they all need money to finance their company.

Though traditional loans are always an option and can provide the funds to help you grow your company, they’re not available to everyone. You need to meet specific and strict requirements to qualify.

So, how can you get the money you need if you don’t qualify for a business loan? Luckily, merchant cash advances are a wonderful alternative to traditional loans. Here’s what you need to know to take advantage of these advances for your business.

How Merchant Cash Advances Work

If your business processes the bulk of its transactions with credit and debit card payments, you’ll be able to use an MCA to get cash quickly.

The advances allow you to use your upcoming credit and debit card sales to qualify for a cash advance of an amount the company qualifies you for based on your transaction history. The process is not a loan. Instead, it’s a cash advance that you pay back with your future sales.

Merchant cash advance companies give you cash upfront once they approve your application. To settle your debt, they’ll take a set percentage of your future credit and debit card transactions plus any fees.

Most companies ask for daily or weekly payments, making it easy to repay the advance quickly.

What Makes Them Different From Loans

When you take out a traditional business loan, you have to meet very strict requirements to qualify in the first place. Your credit score needs to be high and your business must have a proven history of profits for banks to be willing to give you a loan.

If your company is new or your personal credit isn’t great, qualifying can be almost impossible. Further, those loans often require collateral to guarantee the loan in the first place.

This means you risk losing your property, equipment, or other assets if you default on the loan.

Your future sales secure your merchant cash advance, not collateral. The issuing company takes a percentage of what you bring in until you pay the advance in full. They won’t judge you on your personal credit score and they won’t ask you to back the advance with any type of physical property.

Why Businesses Use Them

Most business owners that use MCAs do so because they’re so flexible. There are no use restrictions on how you can use the money once you receive it. The same isn’t always true with bank-issued business loans.

Since the companies don’t look at credit scores or your business history beyond your credit and debit card transaction history, the advances are much easier to qualify for. When you’re new to the industry, advances give you an easy way to get the money you need without having to worry about approaching a bank.

According to RBR Global, the application process is much easier and faster than what you’d experience with traditional loans. MCA companies have to review fewer aspects of your business. This means they’re able to make a decision much faster than banks.

You’ll get the money you need in a matter of weeks, not months.

What to Look for in an MCA

Different merchant cash advance companies offer different terms and amounts based on your company’s transaction history. This means you’ll want to shop around with different companies before you accept a single advance.

Get quotes from at least three MCA providers. Compare the fees, factor rate, and the amount the company is willing to give you before making a decision.

The factor rate works similarly to an interest rate on a loan. You’ll pay that set percentage of your advance amount on every payment you make in addition to a portion of the fees you owe for the advance.

Take your time to compare the terms in detail. Remember, you want to choose a company that offers you the most money with the lowest factor rate and total fees.

When to Consider Working With MCA Brokers

When you’re looking at different companies, make sure to research their reputation before applying for a merchant cash advance. Start by reading reviews online and see what others have to say about their services.

Look for common complaints people have about each provider you’re interested in working with. If most of the reviews mention the same types of issues, you’ll likely experience them yourself. However, if most of the reviews are positive, put the company on your shortlist, and request a quote.

How to Choose Between an MCA and a Loan

Ultimately, a merchant cash advance won’t be the perfect fit for every business in every situation. Before you apply, think about why you need the money and what your monthly budget is like.

If you have a tight budget and need predictable payments each month, applying for a small business loan may be a better choice. Loans have fixed monthly payments with set interest rates and terms that most businesses can meet with ease. The interest rates can be significantly lower than the combined factoring rate and fees you’d pay with an MCA.

However, if you’ve applied for loans and had your application rejected or want the flexibility of a cash advance, an MCA will be a better choice. The payments are flexible and, since they’re a percentage of what you bring in, they’ll go down when your income shrinks. This makes it easier for you to keep your cash flow positive even during lean times.

Is an MCA Right for Your Business?

Deciding between loans and merchant cash advances is a personal decision and it all comes down to what will help your business best.

If you’re looking for a predictable monthly payment and can qualify for a standard business loan, working with a bank may be a good choice. However, if you have a low credit score or need money for purposes that banks won’t approve you for, an MCA will get you the money fast.

Think about how your business will use the funds to make the best decision for your company.

Looking for more tips to help you improve your business’s finances? Check out our latest posts for more.