Find out if a Merchant Cash Advance Loan is a good fit for you and your small business.
In this blog, we will discuss, in detail, every aspect of a Merchant Cash Advance loan.
Q: What takes the conventional bank loan, flips it upside down and spins it on its head?
A: Merchant Cash Advances, or MCA (sometimes just called a cash advance or merchant cash advance loans).
The concept of the merchant cash advance is simple. You agree upfront, to play a flat fee, with no other charges or penalties (including interest) on the lump sum money you borrow.
Your business is unique. Every business is unique. Why is that important? That means your application is reviewed and the flat fee is based upon the health of your business, your business’ performance and its business cash flow. The evaluation process takes a snapshot of your company’s history, including a detailed business cash flow analysis and not solely on your personal credit score from the credit bureaus.
Will a Merchant Cash Advance Work for My Business?
When Jen approached her bank for a small business loan or a line of credit to help with her cash flow, she heard what far too many small business owners hear from financial institutions, “No!”
Jen is a 34-year-old cafe owner who has been serving java in the Florida Keys since 2013. She needed a short term loan or capital loan to bridge the gap after the devastation of Hurricane Irma nearly sank the conch nation. The powerful and unrelenting 130 MPH winds left her location wet and underwater. Her revenue dropped as low as the barometric pressure before the storm.
But she still had to pay her staff. Jen believed that, “when you go into business, you never think about losing it all.” Having lived in the Keys most of her adult life she was prepared for the surge in tides and the hurricane season.
Unfortunately, while the residents of this island retreat were the first on the scene to help repair the damages, her local bank was not so quick. “Even though we made significant monthly deposits through our merchant account and the bank treated us well over the years, now that we asked for business lines of credit, or for that matter any loan types, we were turned away.”
Not one to quit, Jen went online searching for a merchant cash advance provider.
She ended up applying for a business cash advance with a South Florida MCA provider and small business lender – Wise Business Loans. Merchant funding is a form of financing that is a real challenge for virtually every bank, credit union or traditional business lender.
She has taken four cash advances totaling $89,300 from Wise Business Loans, one of the top online lenders and a mainstay in the alternative lending space who regularly lends from $10,000 to $2M to small and mid-sized businesses in Florida as well as the 49 other states. Jen was impressed with how the merchant cash advances were explained in plain English.
Jen asked not to disclose her last name or the cost of funds, however, said, “without the help, I would have been sunk, literally.” (At least she’s maintained her sense of humor.)
She said the best part of the cash advance was access to more capital with better rates and better terms. She thought the best part was being able to repay the loan only when she makes money. COFFEE ON ME!
“Merchant Cash Advances allow me to buy more inventory to sell during busy periods” C.F. Owner – Wholesale Electronics – Toms River, NJ
The moral of the story:
A merchant cash advance can work for you. Even if denied by the banks. It has less to do with your personal credit and more to do with your business, your daily credit card, debit card sales and its cash flow.
One of the main advantages is that it’s easy to set up. You do not have to change credit card processors. Your advance provider will let you know all of the rates and terms before you receive the money along with a business loan calculator to determine the holdback amount, factoring rate and your daily or weekly repayments.
This form of financing is the polar opposite of the banks and their requirements for lots of documentation. These are typically short term and they are paid in months (up to eighteen) and not years. They are designed to help grow your business much like a business term loan.
In fact, all that’s required is a simple, fast and easy, one-page application and the last three months of your business checking account bank statements from your business bank account.
How to Decide the Best Financing Option for Your Business:
Let’s face it – most businesses need a little extra help in today’s economy. Whether it’s for growth and expansion or loading up on inventory at a discount, or when things are slow, and you need to bridge your finances for a month or two.
There are lots of options in today’s marketplace from banks, SBA loans, equipment financing, invoice factoring, angel investors, venture capitalists, peer-to-peer funding or alternative lenders like Wise Business Loans.
Where you go depends on whether your business is tried and true or you’re a relative new-comer looking for startup business loans.
For more information, you can call 888.331.8926.
Why is this cash advance option so appealing?
The reason the merchant cash advance is so attractive to business owners like you is there is less if no emphasis placed upon your personal credit score and more on the number of monthly transactions through your credit card processing. Unlike the banks, alternative lenders will also look at your average daily bank balance, the number of NSF’s as well as negative days. Banks typically focus initially on your personal credit score, your credit business, time in business and profitability after 3 years.
The nice thing about this type of financing for your business is that this type of business finance is the most forgiving in terms of the perceived negatives. On the opposite side of the coin, a good company history, credit profile and average monthly sales will enable you to negotiate or receive a lower flat fee as lenders will see a smaller credit risk, thereby, offering the best annual percentage rate or factor rate and terms.
How do I repay the MCA?
The repayment of the MCA is automatic. This means the funds are ACH’d (Automated Clearing House). The repayment of the advance is based on two numbers. First is the agreed upon flat fee known as the factor. The second is the amount repaid on a daily basis also known as the holdback amount.
What is the holdback?
The hold back is simply the percentage of your daily credit card sales through your payment processors that is used to repay the loan. This number can range from the mid-single digits to as much as 30% for the riskiest of businesses. This percentage is debited from your sales whenever you batch your credit card transactions.
Naturally, it varies daily based upon your card sales for that day. The advantage of this type of repayment over a conventional monthly payments loan is that if you have a poor day, week or month of sales, you are not paying a fixed loan amount that may crimp your cash flow and add additional challenges to your business.
Your holdback is 9%. You have sales today of $3,259.00. The loan payment amount you will repay is calculated by multiplying $3,259 X 9% = $293.31. If tomorrows sales drop to $947.00 your repayment is $947 X 9% = $85.23. As you can see, this type of financing enables you to pay more on your better days and less when stuff happens, like bad weather, a sluggish economy or when, as Forrest Gump famously said, “Stuff happens.”
The second number you need to be concerned with is your actual flat fee. This is represented as a percentage and can range from 15% for low risk to as much as 50% for the higher risk businesses. Typically, this is presented as a rate of 1.15 to 1.50 and is the factor rate.
How do Merchant Cash Advance Companies in USA Work?
The best way to understand the dynamics of the merchant cash advance is through an example. Let’s assume you need to borrow $100,000. After careful analysis of your application and business history, the lender decides to make you an offer. They are willing to lend you the $100K at a rate of 1.27. To figure out what that flat fee if you simply multiply the amount you’re borrowing times the percentage. In this case, simply take the $100,000 and multiply it times 1.27.
Your calculation will show that you will pay back a total of $127,000. So, your flat fee is $27,000.
How long will it take to repay this cash advance? Here’s where the holdback comes into play. Again, for argument sake, let’s assume the holdback is 15%. The lender will ACH 15% of your daily sales to repay the advance. Let’s also assume you’re open five days a week or 240 days per year.
The math works like this.
Your annual sales are $1,200,000. Take your annual sales and divide it by the number of days you batch per year which is 240 days. This means on average you do $5,0000 in sales per day. The lender will now take the holdback amount of 15% of the daily sales or $750 (from the $5,000 total).
What happens if stuff happens? Bad weather, a supplier goes out of business or any number of other disasters. Now your sales drop to $4,000. Do you still owe the $750 which may squeeze your cash flow?
Take 15% of the $4,000 or only $600. Hopefully, this makes sense.
You can easily see how it’s almost impossible to determine how long it will take to repay the advance vs a loan term. This is especially true for ninety-nine percent of businesses that have fluctuating sales daily.
Wise Business Loans offers between $10,000 to $500,00 as cash advances (or more). One of the other huge advantages is that as a business owner you will not face penalties if you run into cash flow challenges.
Are Cash Advances Loans?
No. They are not. In fact, the courts have determined in favor of the MCA as a cash advance and not a loan in every case. There is no collateral or traditional personal guarantee as you’d see with a fixed term loan from a bank, credit union or traditional lending institution. So, the term, “merchant cash advance loan” is a bit of a misnomer as it’s an advance and not a loan.
Banks can take up to 3 months to approve the typical business loan request. The challenge is that the bank will require a significant amount of paperwork. They will examine your personal credit score and typically requires at least a minimum score of 680+.
They will also look at your business credit score and history including the last 3 years of personal and business tax returns. You’ll also need to include all of your business partners and all of their information. It’s starting to feel a little inundating, isn’t it?
With Wise Business Loans, your approval is within 24 hours and funding in a day or two. There is minimal paperwork. Your only requirement is a one-page application and the last 3 months of business bank statements.
When you call us, you will not be speaking to a sales person. You will talk to a professional who has owned a business just like you. We understand the challenges you face as you run your business. Once you apply, you will speak directly with an underwriter who will customize your loan options to fit your business. We look forward to talking to you.