Answers to Important Questions About Merchant Cash Advances
Posted: Aug 13, 2018
Summary: If you have never taken a merchant cash advance, you may be hesitant about going for one. Making attempts to understand the concept and get your queries clarified can help you get over this hesitation easily.
Working capital is one thing every business needs, in order to be in operation. Now, there are different ways to source this working capital from. Nevertheless, one option that is not covered that often is merchant cash advance.
Merchant cash advance can be an excellent way to get some additional capital especially if you are making most of your sales through credit cards. In this you get a lump sum amount upfront as soon as your cash advance is approved. Then with every sales transaction made using a credit or a debit card, a fixed percentage gets directly transferred to the lender’s account via the credit processor. This goes on until the total advance is paid back.
Merchant cash advances are not really small business loans. In fact they aren’t even considered as loans. They are cash advances provided in exchange for a portion of your future sales. Many merchant cash advance providers may have contacted you via merchant cash advance live transfer leads if you are a small business looking for some working capital. However, you will need to know the answers to a couple of questions before you decide on striking the deal with any of them.
What exactly is a merchant cash advance?
A merchant cash advance is a lump sum amount that a business can obtain in exchange for a fixed percentage of its future credit or debit card sales. It is a cash advance that is used to purchase future credit card sales receivables of a business.
What industries benefit by using merchant cash advance?
All businesses that tend to make most of their sales through credit or debit cards can benefit by taking out merchant cash advances. The industries that these businesses belong to are usually retail, restaurants, and ecommerce. Other businesses such as construction companies that get all their payments without the use of credit cards, would be better off with a small business loan or any other type of financing.
How do merchant cash advances differ from other working capital options?
Unlike other types of small business loans, a merchant cash advance does not have a predetermined amount or repayment schedule. The formalities are fewer and the process of approval is quicker in case of an MCA. As a result it can be obtained within the shortest period of time, which could be as quick as 24 hours. Also there is no requirement of collateral.
Although the hold-back percentage remains constant throughout, the amount that you pay varies depends on your credit card sales receivables. Since there is no fixed due date for repayment, the APR will vary widely. Also, instead of the interest rate there is something called the factor rate in merchant cash advance. Ranging between 1.1 and 1.5 this factor rate decides the amount of money that needs to be paid back.
How does the payback schedule work in an MCA?
Merchant cash advance is given against the purchase of future credit card sales receivables, deducted based on a pre-agreed percentage. A fixed percentage of every credit card sales transaction made gets directly transferred into the lender’s account via the credit card processor. The payments are automatic and need no check to be transferred or remittance to be made.
What is the best way of using the merchant cash advance?
Merchant cash advance is best used when there is a chance to increase the revenue. For instance, a contractor who needs some upfront money to win a bid or pay for materials and labor can do well with an MCA. Similarly, if you are a retail location and want to buy inventory, you can benefit from a merchant cash advance. Nevertheless, taking out an MCA for renovating your workspace may not be such a good idea since it may not lead to an increase in your revenue.
Basically the cash flow that a merchant cash advance brings in should create an opportunity for the business to grow. This means that the market should be good and the business should be doing well despite the unpredictable and bumpy cash flow.
The best uses of a merchant cash advance could include paying salaries, buying inventory, investing in new equipment, expanding business, or getting a new income stream. Only an increase in income can help you pay back the advance that you have taken. If you use it for any other purpose you will only be creating bigger problems instead of solving them.
- What are the things you need to keep in mind before taking a merchant cash advance?
- Before deciding on a provider who comes to you via merchant cash advance leads, it is important that you answer a few questions:
- Do I make a decent sum of money through credit card transactions everyday?
- Will I be able to win more business by using these funds?
- Will these funds help in the growth of my business?
- Do I need the money urgently or can it wait?
- Once I take the advance will I be able to generate the sales that I need?
- Will I be able to pay back my other bills and keep my business going if I lose that portion of my future sales?
- How long will I be able to handle the missing percentage from my sales?
The fact that a merchant cash advance is available quickly and easily, even when you don’t have a great credit score, is one thing that outweighs all the high costs associated with this option. Nevertheless, before replying with a ‘Yes’ to any merchant cash advance provider who comes to you via merchant cash advance leads, it is important that you perform your due diligence. Look for hidden costs if any. If using a broker, make sure he doesn’t charge you. Ideally he should be paid by the funder. Look for flexibility in repayment terms. There are providers who offer options such as fixed daily or weekly remittances.
So a merchant cash advance does make sense if you will be able to generate adequate amount of cash through sales. Nevertheless, being informed about the various things involved is very important if you want to use this successfully.
Author writes for Halbart Technologies. A reverse mortgage live transfer leads generation company in New York, US.