REIL Capital Guides: Merchant Cash Advance
Often a shortcut to funding, an MCA, or Merchant Cash Advance, is one of the quickest ways to raise capital for your small business. Cash Advances facilitate businesses with an upfront amount of capital, usually between 80% and 120% of their monthly revenue. The exact amount funded is determined through both the credit card receipts and bank statements of the business.
Businesses leverage Merchant Cash Advances for a number of reasons including, but not limited to: expansion, equipment purchases, daily expenses, and new employee hiring. Here we have a guide for small businesses looking for quick cash through MCA.
What is a Merchant Cash Advance?
Merchant Cash Advances are not loans, but rather the purchase of a business’ future receivables, which is advanced as a lump sum to the business. Once an agreement is made, the funding is transferred directly to the business’ operating bank account. The advanced amount is then paid back either as a remittance of credit card sales, or as a fixed daily or weekly payment.
A relative newcomer to the small business funding arena, the Merchant Cash Advance offers many advantages that other funding options can’t. These include minimal documentation and fast funding, sometimes in as little as 24 hours. Often Merchant Cash Advances enable businesses to receive financing even when they are not qualified for a bank loan or term loan option. However, the cost of a Cash Advance is sometimes more expensive.
Terms for a typical Merchant Cash Advance range between 4 months and 2 years, depending on how long the file qualifies and how long the business intends on spending their capital.
Why Go for a Merchant Cash Advance?
This easy and quick funding option comes with several features, making it convenient for an immediate cash crunch. With minimal paperwork required, many small businesses leverage Merchant Cash Advances to buy immediate inventory to keep the sales rolling, sustain cash flow temporarily, or capitalize on new business resources. Below are the most important benefits of using an MCA that you might not get from other funding options.
Most of the time, applying for a small business loan requires business owners to collect a number of documents such as business and personal tax returns, business balance sheets, debt schedules, and more. However, this is not the case with merchant cash advances. Since the application process remains mostly online, you can get business funding with just two documents:
- Online Application Form
- 3 Months of Business Bank Statements
Fast financing has been the most important reason why many businesses go for a Merchant Cash Advance. The potential for quick approvals and fast funding allows business owners to cover unexpected business expenses. Businesses can get an approval in just a few hours, and disbursal of the funded amount in as quick as 24 hours.
Perfect Credit Not Necessary
If you are a small business owner, you know most business loans place a heavy importance on a strong personal and business credit score. For a Cash Advance, your approval instead relies more on the consistency of your deposits and credit card sales, as well as how long you’ve been in business and your past payment history. Most of these points are covered through the quick underwriting of your business bank statements.
No Collateral Needed
Traditional banks need some form of collateral for business loan security since it is the bank’s way to protect their money. However, while taking a Merchant Cash Advance from a non-banking finance company, you are not required to provide any personal or business assets to secure your fund.
Small business loans typically come with a fixed interest rate, which allows finance companies to set a fixed installment every month for repayment. While this is good for most businesses, it can be problematic if the business experiences a slower month in the market.
Merchant Cash Advances allow you to make flexible payments depending on your business history and credit score. Because an MCA function is based on business receivables, small businesses are able to adjust their repayment terms during slower months to make it easier for them to repay without hurting their business.
Another benefit of taking an MCA is that you can reduce your costs by repaying your advance early. Merchant Cash Advances use a flat cost repayment system, and if you were to pay off early, the total payback amount would be reduced, sometimes very significantly.
Understanding Factor Rate
When you’re discussing Merchant Cash Advances, you may notice payments are specified as a factor rate. Traditionally, factor rates take the place of annual interest rate in Merchant Cash Advances. The factor rate is a decimal point that represents the amount repaid to the provider. While factor rates can run as high as 1.5, with good credit history, you can also get an MCA at a factor rate as low as 1.15.
Many business owners misunderstand the factor rate concept with Merchant Cash Advances because it works slightly differently than actual interest rates in business loans. Merchant Cash Advances are actually the purchase of future receivables at a discounted rate, so the factor rate is interpreted as a flat cost, instead of as a loan, where interest is accrued over time. This means that, while loan rates are typically designed to be confusing, Cash Advances make rates straightforward and easy to understand.
Cash Advances can sometimes have higher repayment than the interest rates on other small business loans, but their simple terms make it easy to understand if it is worth your while. For example, if you were to take a $50,000 advance for your business, at a factor rate of 1.2 and a 12-month term, you’d have to repay a total of $60,000. This is determined really with simple multiplication, not a complicated APR calculation.
Eligibility for Merchant Cash Advance
Compared to other business funding services, the Merchant Cash Advance is a quick, simple solution that most United States businesses will be able to qualify for. Even if you have a bad credit score, your business should still qualify for a Merchant Cash Advance. There are only a few simple prerequisites:
- A business should be at least 6 months old to qualify.
- The lowest credit score business owners need to maintain to qualify is 480.
- The business should also have at least an average of $8,000 in monthly revenue to to receive a merchant cash advance.
How to Apply for a Merchant Cash Advance
MCA providers typically take a couple hours to a few days to approve a business for a Merchant Cash Advance. You can apply for a Merchant Cash Advance using our online application, with minimum documentation and all your business credit details as mentioned above.
The process for a REIL Capital application includes these simple steps:
#1 Online Application
Fill out 2 minute REIL Capital online application, which asks for a few key pieces of information, including your business name, address, business tax ID, and social security number.
Compared to a business loan, a Cash Advance requires minimal documentation. The primary thing needed will be your business bank statements for the last 3 months. Apart from that, Cash Advance providers will ask for a driver’s license and a business voided check to draft contracts. Occasionally, documents such as proof of business ownership, a business location lease agreement, and a previous tax return are required.
#3 Get Approval
With all the boxes ticked, you can get approval in just a couple of hours, and funding in less than a day.
#4 Setup Repayment
Providers may give you flexibility to set your repayment tenure depending upon your time in business and credit score. If you have a strong credit and business history, you may receive weekly payment terms, otherwise you might have to settle on daily repayment terms.
#5 Receive Funds
Once you are done with the application, the MCA money will be deposited into your merchant bank account. The repayment for the same will start the next day or week, from the same account the funds were deposited in.
Is a Merchant Cash Advance Right for Your Business?
Sometimes you want to take advantage of an opportunity that may benefit your business incredibly in the future. Merchant Cash Advances can help you seize that opportunity if it needs capital and your budget is not allowing you to do it. These opportunities can be anything including purchasing inventory at huge discounts, a special marketing strategy that needs immediate implementation, or any short-term capital requirement. If your business can utilize this quick cash and turn it into something big, it is the ideal funding option for your business right now.