Many companies have budget deficits. These can be even worse for new businesses. Businesses that don’t have a lot of customers can offer better terms to attract more business. Just like an entry-level provider, a startup can offer Net 30 terms.
Offering these terms is a great strategy for developing business relationships, but there is a long time lag between the provision of goods or services and payment. And in the meantime, your business bills need to be paid.
What are merchant cash advances?
Technically, an MCA is not a loan. Rather, it is a cash advance, based on a company’s credit card sales. A business can apply for an MCA and get funds deposited into their account quickly. The company can offer net terms of 30, without having to wait a month for payment.
Businesses Merchant Cash Advances Are Good For
A merchant financing program is ideal for businesses that accept credit cards that need quick and easy commercial financing. An MCA program is designed to help them obtain financing, based strictly on cash flow, verifiable by merchant bank statements. As a result, lenders will generally not ask for any tedious document requests.
This is different from what most conventional lenders require. Their document requests may include financial statements, business plans and resumes. With MCA, there is no need for a guarantee. Credit card receipts and company bank statements are the talk of the town.
Merchant cash advance providers assess risk and credit criteria differently than bankers do. An MCA provider reviews a company’s daily credit card receipts to see if a company can repay funds in a timely manner. Essentially, a business “sells” a portion of future credit card sales, in exchange for immediate payment.
With a hold, an agreed percentage of daily credit card receipts is withheld, to reimburse MCA each day. This continues until the advance is paid in full.
The contractor and the MCA supplier agree on the advance and reimbursement amounts, the holdback and the duration of the advance. Once the agreement is concluded, the advance is transferred to the company’s bank account. This is in exchange for a future portion of credit card receipts.
A business that uses a merchant cash advance typically repays 20-40% or more of the amount borrowed (the factor rate). The amount of holdback a small business pays each day (a percentage of sales revenue) is different from the amount of repayment of the entire advance.
The holdback percentage is based on the amount of funds a business receives, the time it will take to repay the money, and the amount of monthly credit card sales.
Access to a business owner’s merchant account eliminates a collateral requirement. Since repayment is based on a percentage of the daily merchant account balance, the more credit card transactions a business makes, the faster it can repay the advance.
Rates on a merchant cash advance can be much higher than other financing choices. The rates can end up being prohibitive. Therefore, it is crucial to understand all the terms offered.
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