Why And When Does A Company Need Merchant Cash Advance?
Substantial working capital is what every business requires to run uninterruptedly and grow exponentially. However, one of the biggest challenges small to medium-sized companies often face is the scarcity of capital. There are multiple financing options, that provide funds to the business owners, struggling hard to thrive in the industry, due to lack of money. But, not all financing options are ideal for all types of businesses. An entrepreneur must pick one, that is suitable for his business type and requirements. For stable businesses which have high credit scores, long trade history and do not need the fund urgently, traditional bank loans can turn out to be beneficial, as these often provide the fund with a low-interest rate. On the other hand, start-ups or small to medium-sized businesses, that have spent comparatively fewer years in the industry, usually face problems in getting approvals from the traditional financial institutions like banks, which have stringent requirements, when it comes to trade history, tax returns and credit score. Besides, banks are quite slow in processing the loan applications, giving approvals and disbursing the amount, due to multiple elaborate procedures and policies, they need to adhere to. Hence, for business owners, looking for urgent cash, but neither have good credit scores, nor considerable trade history, bank loans are, generally, out of reach. For such companies, Merchant Cash Advance(MCA) often acts as a saviour.
MCA lenders only require the borrower to be in operation for at least 6 months and able to show the profit-loss statements or bank statements of those months. Also, they have comparatively low credit score requirements. Unlike traditional loans, MCAs do not require the borrowers to put up their business assets as collateral. One of the primary features of MCAs, that make them desirable, is their approval and fund disbursement time. Once the application is completed and the required documents(bank statements, ID proof etc.) are submitted, the approval generally comes within a few hours and disbursement takes place the same day or maximum within 48-72 hours. Now, let’s understand what MCA is! It can be defined as a quick financing option with lenient requirements and flexible repayment terms. In the case of MCAs, the borrower will receive a one-time, lump-sum amount, that needs to be repaid with a percentage of his/her future credit card or debit card sales. The payment is made daily or weekly, till the entire amount is recovered, and the payable amount gets directly deducted from the business account of the borrower. Hence, this kind of financing option is ideal for businesses, which process a high volume of credit card transactions. When it comes to MCAs, the borrower gets a chance of paying as per the current income of the business. For example, during the slow business seasons, a lesser amount gets deducted, compared to when the business witnesses high sales.
When Does A Company Need MCA?
For a small to medium company or a start-up, MCA can be extremely beneficial when it is going through a financial crunch and unable to carry out regular business operations like paying the electricity bills, giving salaries to the employees, etc. Also, when a business needs to urgently repair the existing equipment or buy a few more, to meet the high demand of the customers, MCAs can be opted for. A good option for businesses looking to cover short-term expenses, MCAs often aid seasonal businesses, that require quick funds to cover temporary cash flow issues. For example, seasonal businesses like food trucks, lawn care and landscaping companies etc., often need a higher number of employees during the peak business season, to meet the high demands. But, due to money constraints, many such businesses fail to recruit additional staff. This is when MCAs come to play. With MCAs, borrowers get the freedom to use the funds for any business operation. As seasonal businesses require funds before the season gets over, they require lenders who will be able to provide the required amount within a short notice. Hence, MCAs are considered one of the most beneficial and convenient financing options for such businesses.
What Makes MCAs A Desirable Financing Option?
The quick and easy application process MCA application doesn’t require long paperwork. If all the required documents are submitted, some lending companies do not take more than a day to approve the application and transfer the amount to the borrower’s business account.
Non-restricted funds usage Unlike the traditional funding options, which require the borrowers to give a detailed plan of funds usage, MCAs allow the borrowers to use the funds for any purpose.
No requirement for collateral For businesses, which have limited or no assets, MCA is the best financing option, as it is unsecured finance and doesn’t tie up any business assets as collateral. Hence, businesses can unhesitatingly get an MCA without the fear of losing their valued assets.
Higher approval rate and flexible repayment plan As MCAs have lenient requirements, the approval rates are considerably high. With room for negotiation, a borrower gets a chance to recalculate the interests or change the repayment plan, as per the requirement of the business.
Summary: Business owners often face money-related issues when the monthly expenses go higher than the cash inflow, due to slow sales or customers falling behind on payments. This is when MCAs back the businesses with required funds, that can be used by the business owners to cope with sudden emergencies like equipment maintenance, repair or purchase, cover payroll or any other business operations.