Merchant Cash Advance or MCAs offer an advance based on a percentage of the borrower’s future credit and debit card sales. Also, sometimes, the lender withdraws a fixed amount from the borrower’s bank account to recover the fund.
For a small business owner, who needs quick hard cash, Merchant Cash Advance or MCA is often an attractive solution. When it comes to MCA, one doesn’t need to wait for months for fund disbursement. Hence, in circumstances where a business requires immediate expansion plans or is facing revenue shortfalls, MCA acts as a saviour. However, the way a coin has two sides, the concept of MCA has a few advantages and disadvantages as well.
These come with less rigid requirements regarding credit score, annual revenue, etc. Easy to apply, online loans take less time to get processed and the amount to get disbursed. But, the only disadvantage is that these have higher rates of interest and fees compared to bank loans. Online lenders offering short-term loans (STLs) have high-interest rates and lax requirements considerably. As suggested by the name, short-term loans have a shorter repayment term, mainly within a year or a few months. These come with a factor rate fee structure instead of an interest rate and a higher total loan cost. The daily cash flow is prioritized over the credit score of the borrower. Also, STLs demand more frequent repayments, often daily.
Unlike traditional bank loans, MCAs do not require extensive paperwork. All one needs are the credit card receipts and bank statements of the last few months to understand the worth of the business and the repayment capacity of the borrower. Typically, MCAs get approved within a week and sometimes in less than a week.
No collateral required
A borrower doesn’t require to show collateral to get an MCA approved. Whereas, bank loans ask applicants to pledge business assets like equipment or personal assets like investment accounts.
If the borrower is paying back the amount based on a percentage of his/her credit and debit card sale, the repayment amount is not predetermined. In case the sales go down, the payment amount is low. In such a scenario, the borrower doesn’t have to worry about paying back a fixed amount during certain inevitable bad days of the business.
Fixed Factor Fee and No piling up of Interests
Unlike banks, an MCA never accumulates interest over time. The factor fee, which is mostly expressed as 1.2 or 1.5, is the only fee the borrower pays. It is a fixed fee assessed on the advance, unlike a credit card’s rate that can get changed while paying off an amount. One can deduct the factor fee as a business expense, with the condition of repaying the initial borrowed amount along with the upfront borrowing cost.
No relation with credit score
The credit score of the business or the borrower is never a determining factor of an MCA approval. What matters is the business’s cash flow in the last few months to assure the lender that the advance can be easily recovered.
Repayment depends on Cash Flow
The repayment on an MCA is a percentage of sales and hence, it aligns with the cash flow of the business. An MCA agreement features a holdback percentage, which is a per cent of credit card receipts taken by the lender as a repayment. For example, if a borrower has a holdback of 12% and sales for one day is $1,800, $216 needs to be paid in the advance.
A borrower can opt for automatic payments by choosing the split withholding or lockbox withholding payments methods. The credit card processor or bank can split the credit card receipts between the borrower’s account and the MCA lender.
Funds can be used for any purpose
In most small business investments, other than MCAs, the borrower needs to stick to the purchase of specific products, equipment or buildings for which the loan got approved. But, in MCA, one doesn’t need to explain the use of the borrowed fund.
Conventional bank loans are offered with annual percentage rates of less than 10%. MCAs provide funds with an interest rate that often reach the triple-digit realm. However, it varies with individual lenders.
High annual percentage rates or APRs
The APR on an MCA is based on how soon the borrower is capable of paying back the amount. When the sales of a business are going high, the borrower is expected to repay the fund quicker and incur a higher annual percentage rate. The longer a borrower takes to pay back the advance, the lower the APR gets.
In MCAs, APRs are often 30%, 60% or even 100%, at times.
No federal regulation and Complicated Contracts
MCAs do not fall under the category of classified loans. Hence, no federal regulations get applied to MCAs, which can govern the activities of the lenders. Applicants or borrowers won’t be secured by laws such as the Truth in Lending Act.
Due to the lack of regulations, the language and the structure of the contracts are often confusing, with
no mention of the annual percentage rate mentioned in the agreement.
Less control over business
Some MCA lenders interfere in the borrower’s business operations by mentioning in the contracts. Hence, one should meticulously go through the operation restrictions in the MCA contract before signing it. Besides, some lenders require the borrower to use a specific credit card processor, with whom they have a partnership or pre-existing relationship.
A delay in receiving credit card funds
If the repayment is taken through lockbox withholding, the borrower might have to wait an extra day for the funds to be released from credit card sales. The money is received by the bank from the borrower’s credit card sales. The bank then sends the portion to the lender’s account to pay back the advance.
Small businesses which do not qualify for bank loans or other traditional finance solutions can consider MCA and get working capital in a quick, hassle-free way. However, comparing different finance options and doing in-depth research on the pros and cons of all the solutions is always crucial. To know more about MCA and apply for it, you can visit ZEROPOINT Finance by clickinghttps://zeropointfinance.com/merchant-cash-advance/.