Understanding Merchant Cash Advance (MCA) and How It Works

A merchant cash advance provides small business owners quick access to capital for emergencies and all types of business needs. As key players in this industry, the Wide Merchant Group offers convenient, simple and quick financing programs for various business purposes in Los Angeles, California. Find out more about our merchant financing services in this article.

Understanding Merchant Cash Advance (MCA)

While most people confuse a merchant cash advance (MCA) with a loan, the truth is that these two financing options are different. Your business can receive an MCA provided that you share a percentage of your debit card and credit card sales with the MCA provider. You will also have to pay a fee for the service. Merchant Cash advances are typically quick to acquire and do not require a good credit score or collateral.

The maximum advance amount for an MCA may range from $2500 to $250,000 depending on the financing company. The provider may require you to make daily repayment via your merchant account.

How an MCA Works

You will need extra capital in the course of your business operations. The problem with most conventional financing options is that they take time and have strict measures. Even after applying for a conventional loan, you may fail to meet the requirements designed to favor large businesses.

With the various types of merchant cash advances, an MCA provider will give you a large sum of money. The provider expects a portion of sales generated from credit/debit card payments in return. Generally, you will pay back the MCA by remitting a percentage of your total sales from your business bank account. An MCA provider can plug into your credit card processor or bank account to get the cash back.

How Long Does it Take for a Business to Pay Off an MCA?

On average, the repayment term for an MCA ranges from eight to nine months. It may also take your business as short as four months or as long as eighteen months to clear the cash advance depending on your operations. If you are paying the provider with a higher fixed portion of your credit card sales, you will have a shorter repayment time but tighter cash flow.

Does Financing Laws Cover Merchant Cash Advances?

The California Financing Law (CFL) has historically been guiding licensing procedures for finance brokers and lenders. The law is provided under Division 9 of the Financial Code. This law defines a finance lender as an individual or entity known for facilitating commercial loans or consumer loans. Both finance lenders and brokers require licenses to operate in California.

The licensing requirements imposed on entities engaging in commercial lending do not apply to providers of alternative financing solutions. These alternative solutions include merchant cash advances and factoring. MCAs are not covered under the California Financing Law since they do not qualify as loans. Though MCA providers do not require a CFL license, they are mandated by the California Disclosure Law to make detailed and specific disclosures about their products.

The Cost of an MCA

Depending on the type of MCA you are seeking, the cash advance may take a toll on your cash flow. Knowledge of the cost of a merchant cash advance is crucial to your business if you are considering this financing option. Every cent received as a cash advance will be deducted from your credit card sales.

Your payback amount will always be determined by the factor rate set by the MCA provider. It will also remain the same whether you choose to pay the MCA back in two months or a year.

Interest rates are designed to accrue over time while factor rates are not affected by the time taken to repay a merchant cash advance. When your business records higher credit card sales in a day, the amount collected by the MCA provider will be higher as well. When you record lower credit card sales, the amount collected will be smaller.

Is Your Business Eligible for Merchant Cash Advances?

An MCA could be an ideal solution to financing problems experienced by your business if you have a low credit score or little/no collateral. You may also seek it if you have a limited business history. MCA providers have attractive eligibility standards, which make it easy for most small enterprises to qualify.

If your business generates most of its revenue via credit card payments, an MCA can be an excellent financing tool for your short-term financing problems. Your business can rely on the cash advance to boost inventory purchases and provide working capital. An MCA is also a great solution for settling unexpected payments and debt payments.

Merchant cash advances are suitable for businesses looking for short-term financing but have cyclical or seasonal revenues. Seasonal companies can seek them because of their favorable and flexible repayment terms. However, other types of businesses may seek them if they are currently not eligible for SBA express loans and need faster funding.

How Long Would it Take Your Business to Fully Pay Back an MCA?

While the repayment term of merchant cash advances varies, you may expect to pay your MCA in a maximum term or 12 or 24 months. The repayment term varies since the payments are based on the percentage of revenue of your daily credit card sales. If you have a stable cash flow, it may take you a shorter time to pay back the cash advance.

To estimate the repayment term:

Multiply the holdback percentage with your monthly credit card sales
Divide the total funding cost by the estimated monthly payment figure to determine how long it will take you to repay

Choosing a Merchant Cash Advance Provider

Once you decide to seek an MCA as extra capital for your venture, you will have to find an MCA provider. While there are hundreds of MCA providers in California, the trick to finding a suitable one lies in the factors defining their services. You will want to know their factor rates, MCA limits, and holdback percentages as discussed below:

Advance Limit
MCA companies have limits to the amount of money they are willing to give your business as an advance. Established providers tend to offer higher limits to the amounts while less established ones tend to offer lower limits. Your choice depends on the amount your business needs to recover from a particular financial hurdle.
Holdback Percentage
A holdback refers to the amount of money kept in reserve by an MCA provider until you meet various conditions. The money is usually a percentage of your debit card or credit card sales withheld by an MCA provider to settle a cash advance. A holdback percentage determines the amount of money an MCA company will subtract from your daily credit card sales. A higher holdback percentage translates to a higher payback amount.
Factor Rate
The first step to understanding the factor rate of your MCA is to determine the amount of money you need to pay back. A factor rate helps to express the interest amount an MCA provider can charge on your advance. Unlike interest rates, which change as your debt reduces, factor rates are only imposed on the original cash advance amount.

MCA providers consider your credit card processing statements and bank statements for your business to determine a factor rate for your MCA. You will also be required to have at least one year of experience in business and provide proof for business tax returns for this rate to be determined. MCA providers use this information to determine the factor rate needed to compensate for the risk of giving you an advance.
Customer Reviews
MCA providers base their reputation on the type of reviews and feedback they receive. Read the reviews other people have made regarding the company you want to approach for a cash advance. If most of the reviews are positive, it may symbolize a good reputation. In this case, reputation stems from issuing clients with attractive merchant cash advance options.
Additional Fees
Expect an MCA provider to charge your business additional fees when seeking a cash advance. The additional fees may include advance fees or setup fees. They can be five percent of the cash advance or more. Consider speaking with a representative of the MCA provider to know if there is an additional fee before seeking their financial help.

How to Apply for an MCA

Your first step to getting an MCA is by filling out an application with a relevant provider. Since you will be paying the MCA with your daily credit/debit card sales, the MCA provider will ask you for processing statements showing these sales. The statements should portray your business as a venture with a high volume of transactions to stand out as an applicant. You may also need to present your bank statements and credit score.

Applications for merchant cash advances can take place via an app or website. You must have a solid Internet connection for you to submit the required information. Other documents you need for the application include business tax returns, voided business check, and a driver's license. The application process is as follows:

Filling Out an Online Application Form

MCA providers usually offer potential and existing clients a one or two-page form for MCA applications. The details filled in this form help the provider to assess your company’s level of suitability. Once you fill it out, the provider will reach out to you asking for further documentation. You may be asked for your business tax ID, Social Security number and general information about your business.

Within 24 hours of submitting your application, the MCA company may ask you to provide evidence of accepting credit cards in your business for at least two years. Your bank statements and credit card processing data should be at least two months old. The provider will rely on this documentation to verify whether your annual credit card receipts indicate an adequate cash flow.

Getting Approved for a Merchant Cash Advance

An MCA company may approve your application in 24 hours depending on the information you filled. Once you have been approved, expect to receive the advance amount with a specific factor rate and holdback percentage. Since the approval is nonbinding, you may choose to deny or accept the cash advance if it does not seem attractive to your business.

Setting up an Account with a Credit Card Processor

You may be required to switch to a new credit card processor if your MCA provider does not work with the previous one. Though it may be time-consuming to make the changes, setting up the account is a prerequisite for accepting a cash advance. If it takes a week to set up the account, it may also take a week to have funds remitted to you.

Receiving the Merchant Cash Advance

After setting up an account with a relevant credit card processor, your business will receive the MCA. You will have the initial amount deposited directly into your business bank account. Once you receive it, you can also start paying the MCA company. Your credit card processing firm will facilitate repayments for the cash advance.

Making Daily Payments for the Cash Advance

Your MCA provider will take payments for the cash advance directly from the merchant credit account belonging to your business. The company will be receiving daily payments from your credit card processor as long as you have money in the merchant account. You should be prepared to make these payments once the cash advance is sent to you.

Are Merchant Cash Advances Worth the Hype?

Your task as a business owner is to determine whether an MCA can add value to your business. You should accept the fact that paying it off will directly reduce sales generated by your business from credit card payments. Unlike a conventional term loan, you will not incur fines for late payments or be mandated to make payments on time. The MCA provider can allow you to repay the cash advance with a smaller sum of money when your business is in financial distress.

Since MCAs come unsecured, you will not have to give collateral to access them. A merchant cash advance may be ideal for you (a business owner) if you are not willing to use your assets as collateral when seeking a loan. Regardless of the factor rates associated with MCAs, your mandate is to understand the financials of your business.

Get a Merchant Cash Advance Near Me

Simplicity, faster access, and convenience are the three attributes used to describe the value of merchant cash advances. Wide Merchant Group offers business owners merchant financing solutions with fixed rates, minimal paperwork, and flexible payables. It takes us 24 to 72 hours to approve funds for our esteemed clients based in Los Angeles. Call us today for a business loan at 800-630-4214 for a consultation on merchant cash advances or any of our financing programs.