What is Merchant Cash Advance? Merchant Cash Advances Explained.
A merchant cash advance, aka MCA, or a business cash advance provides you with a lump sum for working capital. As an entrepreneur or business owner, you can use this type of financing to expand or bridge you over any bumps in the road. A merchant cash advance provider offers this financing option to businesses that usually have a high volume of daily transactions. Repayment of these advances is through your future credit card sales and debit card sales. Your company’s ability to repay a percentage of your daily batches is the reason the merchant cash advance works. Business cash loans are offer flexible repayment terms. As business owners, this means that when your gross sales are down, your loan payment is less and when your gross sales are up, you pay a bit more.
These funding options help you manage your cash flow and grow your business.
- No application fee, No cost, No obligation
- No change to credit card processing or merchant account
- 1-page application, the most recent 3 months’ business bank account statements
- Avoid the hassle and documentation of traditional financial institutions, bank loans or business funding
- Proof that time in business is six months or more
- Minimum annual revenue of $150,000
- Personal credit score of 500 or higher. Bad credit OK
- Monthly credit card volume processing of $5,000 or more
- Daily or weekly repayment
- 24-hour approval. 24-hour funding.
Who Invented Merchant Cash Advance?
The first known secured loans date back to ancient Greece and Rome. The lending practices used collateral to minimize the risk to the lender. Fast forward to the Middle Ages and merchant financing started taking shape. The first credit cards began in restaurants in the early 1950s. In the early 1990s, the first financing against credit card sales took place, although they didn’t call it an MCA. It wasn’t until the early 2000’s that the industry took the form as we know it today.
How do Merchant Cash Advances Work?
The basics of the business cash advance, or MCA, is the business owner receives a lump sum of cash to his or her business bank account, usually the business checking account. The business owner will agree, in exchange for this cash advance to provide the advance provider a percentage of your credit card and debit card sales. These future credit card receipts and debit card sales now describe this popular business finance option.
A merchant cash advance usually has relatively short repayment terms. Payback of these advances ranges between ten to twenty-four months. Small payments characterize them. These payments are based on the daily credit card transaction. The payment processors or credit card processors batched the total sales daily and based on these daily sales will debit the holdback amount. The holdback percentage is an annual percentage rate that is pre-determined by the business lenders. The rates for
the holdback can range between single digits to 30% of your total daily credit card sales.
As an example, if your holdback percentage is 16% and you do $1,000 in sales today, the lender will debit your account $160, which is used to pay down the business cash advance. The math is relatively straightforward and does not require a business loan calculator.
Is a Merchant Cash Advance a Loan?
Technically, this is not a business loan. If it’s not a small business loan, then what are these business cash advance loans? The reason these are not a loan is that they are based on the sale of a future receivable. That receivable is the future credit card or debit card sales while it may sound like hair-splitting and semantics, over the years all the courts have sided with this definition and understanding.
How Much Does Merchant Cash Advance Cost?
The next number to understand is the merchant cash advance factor rate. We show the factor rate as a percentage. This rate is not what is commonly known as an APR or annual percentage rate.
We also refer to the factor rate as the flat fee or cash advance fee. The merchant cash advance fees are also known as the cost of funds. The factor rate can range from as low as 1.14 to as high as 1.38. The difference in rate is a reflection of the risk to the cash advance lenders.
As an example, if merchant cash advance lenders, based on a risk assessment determine that the factor rate is 1.23, that means you will repay twenty-three cents on every dollar you borrow. If you borrow $100,000 in this example, you will repay a fixed flat fee of $23,000.
To fully illustrate the difference between the MCA and a bank business term loan, let’s break it down.
While a bank may theoretically offer large loans with monthly payments and a longer loan term, the first criteria they consider is your personal credit score and personal guarantee. If you’re below their minimums on either, you’re out of luck. You will not qualify for a bank or personal loan. Before you can consider business lines of credit you must show at least three years’ time in business, with all of the individual and business tax returns, etc. You get the picture.
Are Merchant Cash Advances a Good Idea?
The question is whether the MCA has any distinct advantages over the traditional bank loans. For many business owners, the most significant advantage is the fact that their repayments, whether daily or weekly, fluctuate based on their company’s sales. Think about it. Basing your payments on sales gives you have much better control over your cash flow.
Let’s say you’re having a particularly lousy week or month. The drop-in sales can be for a whole host of reasons. It could be due to the seasonality of your business or just a season of bad weather. Imagine a company located anywhere near the natural disasters we’ve seen over the years. These disasters could be the rash of hurricane, blizzards, tornadoes or earthquakes. You get the picture.
Getting a quick business cash advance compared to a bank loan is night and day. Processing quick cash advance loans take in twenty-four hours or less. That is significantly quicker than a typical bank loan, by weeks if not months. Even if you qualify for SBA loans, do you have the time to wait as much as 90 days while providing over 20 different documents not to mention the time to gather it all up? Even a merchant cash advance bad credit means you the business owner gets fast cash
advance online quicker, maybe in a day or two. It’s a simple one-page merchant cash advance application and the last three months of business bank statements.
Another significant advantage is the MCA providers give more weight to the health of a business rather than the owner’s personal credit scores. The harsh reality is that most small business owners do not qualify for a conventional loan. What you may find is the best merchant advance companies, and online lenders are willing to offer you that capital loan (even with a bad credit profile).
Is Merchant Cash Advance a Safe Option?
An example of your typical merchant cash advance transaction is as follows:
You own a business. You need money. You go to the bank and fund that they have no interest in helping you. Although you’ve banked there for years and probably have your mortgage and auto loans with them. You look online for a cash advance direct lender like Wise Business Loans. As one of the best merchant cash advance lenders within 24 hours, your approved cash advance awaits you.
Here is how the MCA works.
You need $35,000. Let’s look at this in two ways. The first way is to ask yourself if you’d be willing to sell $44,800 of future credit card sales for a $35,000 lump sum today? Or, does it make sense to borrow $35,000 today and repay a total of $44,800 over time? If you answer, “Yes” to either question, what does that mean?
Two numbers are crucial to you understanding how this works. First is the factor rate. Remember, we stated that it could be between 1.14 to 1.38. In this example, we arbitrarily used 1.28. So, for every dollar you borrow, you will repay $1.28, or you’re selling $1.28 in future receivables for $1.00 today. With me so far?
The second number we need to focus on is the holdback percentage. Again, to refresh your memory, we said this could be a single digit number to as much as 30%. For this example, let’s say it is 15%. Fair enough?
The merchant cash advance direct lenders provide you with the $35,000 today. Your businesses gross annual revenue is $420,000. You look at this as a restaurant cash advance since you own a bakery. To keep things simple, you’re open daily year-round. You batch daily. However, the banks don’t process on the weekend (and holidays), but for simplicity, we’ll say there are 240 days in the year to pay it back. Your daily sales average $1,750 (I divided $420,000 by 260).
The holdback amount is 15%, so we take $1,750 and multiply it by the fifteen percent to get $262. The $262 is the amount you’ll repay daily. Since your total capital cash advance is $44,800, we divide that amount by the $262 to calculate the number of payments. The number is 171 payments. Following along means if you divide the 171 by the 20 payments per month, you’ll get a payback period of about 8.5 months. WHEW!
Now here’s the best part. If you have a bad day, and your sales drop to $837. You take the 15% holdback and now that daily payment is only $125 (vs. the $262). Do you see how that helps, especially if your cash flow is erratic like 90% of the retailers out there? The flip side is that it’s a holiday weekend and sales bump up to $2,675 a day. Now your payback amount is $401. Got it?
What is a Merchant Cash Advance Company?
To review, the merchant cash advance provider, like Wise Business Loans, agrees to purchase a percentage of your company’s future credit card or debit card sales. In exchange, the company agrees to repay the business cash advance daily (sometimes weekly based on risk). The company understands that if sales go up a bit more is paid, and if sales go down, a bit less is paid back.
How to get cash advance from credit card sales?
The bottom line is this — the decision to go with the merchant cash advance program is all about your ROI or Return on Investment. Business funding mastery is understanding what the money will do for you and your business. It’s not about online cash advance lenders, but the use of funds. The top merchant cash advance companies will all ask you the same thing. “Why do you need the money?” The best cash advance companies will take it a step further and ask about your margins and the profit
potential or ROI.
What does that loan amount $35,000 in the above example do for your business? How much will more money net your company by taking the advance? Again, going along with the bakery example you need some for new equipment. You don’t qualify for an equipment loan, so you take the small business cash advance. Your new mixing equipment will enable you to increase the production of your best selling pastries and increase revenue by 25%. If you’re grossing $35,000 a month and it increases by
25%, that means an additional $8,750 a month. Based on our numbers the added $8750 says you’ll be profitable in about five months (3 months shorter than the advance payoff) and you” see significant profits by the end of the year. Do you now understand why so many of our clients will re-borrow 2 – 3 times a year? Some of these business owners borrow several years in a row. Our best clients do not see the flat fee as an expense but as an investment in their business and future.
Join the 1,000’s of business owners who see the advantage of working with a cash advance direct lender who understands how to get a cash advance to grow their business.
Call 888.331.8926 Now or Apply Online.
Pour House Grill
5 Star Rating!
Sports pub with BBQ, Burgers and wings with a large selection of beers, ciders & wine on tap. Has several locations.
“I have been looking at a couple of options for a loan for expansion of my second restaurant. I am looking to get around $75,000 to do this project my one restaurant does over one million a year in sales with about 95 % of that in credit card transactions. To make a long story short I got smart and figured I must know somebody in the space so I am reaching out to you to see if you can help.”
How Wise Business Loans Helped
Since this establishment did a high volume of credit card transactions, they were a perfect candidate for a merchant cash advance. Their initial MCA was for eight months and $47,100. After successfully completing six months of payments they decided to complete the project and borrow an additional $90,000 with better rates and terms.
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To repay the loan depends on the health of your business and cash flow. Payments are made each day you batch your credit card receipts with our cash advances. Our installment loans get repaid with daily, weekly or monthly payments.
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