Cash Advance for Merchants: Processing, Pros and Cons

A Merchant Cash Advance (MCA) or Business Cash Advance is a variety of loan that lends money to businesses and startups quickly and efficiently. Trade financing options, along with short payment terms of typically 24 months and regular rewards, paid every business day, characterize the MCA. The system opposes the usual higher monthly payments of traditional bank loans and the associated longer disbursement periods.

In general, MCA can be used to describe short-term business loans and future receivables from credit card sales. This type of financing is available to businesses that have a stable and ongoing deal with credit cards, including restaurants, retail stores, pharmacies, etc.

How does a merchant cash advance work??

The process of getting a business cash advance is usually quick. The most important step is the identification control of the company that wants the loan. The documentation required for this includes:

• Government issued proof of identity
• Processing of bank and credit card statements
• Business tax returns

Once the ID is processed and approved, it is only a matter of days before the business receives the loan amount. They then receive a lump sum and pay it back by generating sales to customers.

To repay the loan amount, the borrower offers a percentage of the sales, as specified in the contract, to the lender on a daily basis. It can also be done through the merchant account, calculated based on connected sales processed through debit and credit cards. In this case, check and cash sales do not count towards the daily fee.

Rewards can also be taken directly from the borrower’s bank account through Automated Clearing House (ACH) payments. By this logic, small businesses with low credit and debit sales rates may also qualify for MCA if they opt for ACH payments.

MCA loanable amounts range from a few thousand dollars to more than two hundred thousand dollars. Regardless of the amount rented, the repayment period is usually very short. In most cases, it’s about 18 months or so.

Advantages of CAM:

MCA has several benefits, some of which include:

• An effortless application process: MCA involves a quick application process and it is possible to borrow money in one day. It is also easy to qualify since, in this case, the credit history of the loan is less significant than the sales history.
• flexibility: MCA allows for numerous payment plans and methods and allows borrowers to use the funds as they see fit. Since payments depend on a percentage of daily transactions, borrowers do not have to pay if they have low incomes. It results in cash flow problems that can drive the business into deeper debt.
• No warranty: MCA loans are unsecured, which means that it does not bind borrowers to any collateral. For companies with limited assets, this feature is a boon.

Cons of CAM:

The disadvantage of MCA encompasses:

• Possible cash flow problems: MCA requires a specific amount of the borrower’s future sales dedicated to repaying the amount borrowed. This results in an emitted cash flow that can lead to deeper debt for the business.
• Comparatively higher costs: The cost of obtaining an MCA, such as factor fees and not interest rates, is much higher than many other types of financing. Factor rates do not depend on a specific period, so paying in advance does not help save money.