How Does A Merchant Cash Advance Work?
Merchant cash advances have been increasing in popularity in recent years. The MCA product earlier started as a solution to finance future credit card sales. Nevertheless, it has evolved into a primary solution that allows small businesses to finance all kinds of future sales.
Let’s take a look at Merchant cash advances and understand how they work.
What Is A Merchant Cash Advance?
Merchant cash advance loans are a short-term solution to get quick business funding. In MCA, you can sell your future sales means all the funding is based on your future revenue where repayment often begins immediately.
It is the most common name for a business cash advance, and also known as revenue-based financing, a turnover loan, or a revenue loan.
MCA is different from a business loan. It effectively sells future sales to the lender at a discount rather than having a prominent loan amount and rate of interest. That is why this product is not a loan, it is the sale of a future asset.
Commercial Sales Vs. Credit Card Sales
A merchant cash advance is the best solution to finance most types of future sales such as credit card transactions. Lenders can finance both net-30 commercial sales or future cash sales.
With easy repayment, different repayment methods are explained in the following sections.
How To Calculate The Funding Amount?
The merchant cash advance lender concludes how much cash advance should be given to your small or new business by reviewing the past sales. The lender also analyzes your bank statements and reviews the past credit card transactions.
On average, merchant cash advance lenders fund your business anywhere between 80-150 percent of your average monthly sales, depending on your lender. It is based on the average financial strength of your company.
What Will Be Your Payback Amount?
The payback amount ranges from 9-50 percent more than the actual funded amount Ranging from 1.09-1.50 percent, merchant cash advance lenders usually call this amount a factor. And your payback amount is determined by multiplying the advanced amount by this factor.
Let’s take an example, a factor of 1.35 with $100,000 as merchant cash advance requires a total of $135,000 as payback. In this case, you are repaying 35% more than the actual amount you got.
All the transactions of MCA are usually short-term, varies from 3 to 15 months. You need to consider both the repayment term and the cash advance factor to calculate the APR of the transaction which is generally much higher in the regular business loan.
What Are The Benefits Of MCA
MCA has various benefits over traditional loans.
- No collateral required
- You get fast money
- Easy to qualify, even with bad or poor credit history
- Flexible credit score requirements
- Can be used for whatever you want
- Flexible installment
How To Repay The Cash Advance Amount?
Advances which are based on the monthly or weekly credit card sales can be repaid by sharing the future daily revenues with the cash advance lender. It generally ranges from 8-10 percent of your total sales.
This percentage-based collection policy allows you to increase or decrease the payment according to the sales of the month until the funds are paid off.
A merchant cash advance is an ideal financing option for providing urgent funding to your small businesses. It only takes a few minutes to apply online and you’ll get the working capital within 3-7 days.