Funding is crucial for any small or medium-sized business (SMB) looking to grow or navigate unexpected financial hurdles. Merchant cash advance (MCA) lenders offer a unique alternative financing option for companies that might not qualify for traditional bank loans.
For example, Shopify Capital might advance $5,000 for $5,650 paid from your store’s future sales, with a remittance rate of 10%.
But how do these lenders assess a business’s health to determine eligibility for an MCA? This blog will delve into the key factors MCA business health assessments consider, helping you understand what lenders look for and how to position your business for success in the application process.
Traditional Loan vs. Merchant Cash Advance: A Different Approach
Traditional loans and MCAs both provide business funding. But, they serve different needs and have clear pros and cons.
Here’s a comparative analysis to help you choose the most suitable option:
Feature | Traditional Loan | Merchant Cash Advance (MCA) |
Focus | Creditworthiness & Repaying Fixed Amount | Present & Future Cash Flow Potential |
Collateral | Often Required (Property, Equipment) | Typically Not Required |
Repayment | Fixed Monthly Payments (e.g., $2,000/month for 6 months) | Percentage of Daily Credit Card Sales (e.g., 10% of sales until advance + fees repaid) |
Example | Borrow $10,000 at 12% APR. Repay total of $12,000 ($10,000 + $2,000 interest) in fixed monthly installments. | Receive $10,000 advance. Repay 10% of daily sales until $13,000 (advance + fees) is repaid (assuming a 1.3 factor rate). |
Understanding What MCA Lenders Look For in a Business:
While an MCA lender might consider your credit score, it’s not the sole determining factor.
Here’s what typically takes center stage:
- Cash Flow: This is the golden metric for MCA lenders. They want to see a consistent and predictable flow of revenue, often analysing your past 3-6 months of bank statements or daily credit card sales. A strong cash flow demonstrates your ability to repay the advance without financial strain.
- Industry: Some industries naturally generate higher and more predictable sales volumes than others. Lenders may have experience with specific industries and understand the typical cash flow patterns within those sectors.
- Time in Business: Established businesses with a proven track record of success are generally viewed as less risky by lenders. However, some MCA lenders may cater to newer businesses with promising growth potential.
- Business Model: A transparent and sustainable business model demonstrates the viability of your operation. Lenders want to understand your target market, revenue streams, and how you plan to use the MCA funds to further your business goals.
- Debt-to-Income Ratio: This ratio indicates your debt obligations compared to your income. A lower ratio signifies a stronger financial position and a greater capacity to handle additional debt.
Beyond the Numbers: Building a Strong Case for Your Business
While financial data is crucial, it’s only part of the picture. Here are additional factors that can strengthen your MCA application:
- Positive Online Reviews: A solid online reputation builds trust and indicates customer satisfaction.
- Clear Business Plan: A well-defined business plan demonstrating future growth potential and strategic use of the MCA funds can make a positive impression.
- Prepared Documentation: Having all your financial statements, tax returns, and business licenses readily available demonstrates organization and transparency.
Maximizing Your Chances of MCA Approval
Understanding how MCA lenders evaluate business health empowers you to showcase your business’s strengths. Here are some key takeaways:
- Focus on Cash Flow: Demonstrating a healthy and consistent cash flow is the most critical factor for securing an MCA. A study found that 84% of applicants who applied for a merchant cash advance in 2020 were approved, highlighting the importance of cash flow in the approval process.
- Highlight Your Strengths: Beyond financials, emphasize your industry expertise, positive customer reviews, and a well-defined business plan to illustrate your company’s potential.
- Prepare Thorough Documentation: Having all the necessary documents readily available streamlines the application process. Remember that only 71% of business owners who apply for a merchant cash advance get approved, so thorough preparation can give you an edge.
Conclusion
By understanding merchant cash advance assessment criteria and presenting your business in the best possible light, you can increase your chances of securing an MCA and propel your business forward.
Remember, MCA lenders are looking for strong business partners with growth potential. By showcasing your financial stability, industry expertise, and a clear vision for the future, you can position your company for success in the MCA application process.
FAQs:
1. What is the required credit score for a merchant cash advance?
A: Credit score is a factor but not the sole determinant. MCA lenders look more at your business’s cash flow and future earning potential.
2. How long does it take to get approved for an MCA?
A: The approval process for an MCA is typically faster than traditional loans, often taking just a few days.
3. What are the typical fees associated with an MCA?
A: There can be various fee structures associated with MCAs. It’s crucial to review the terms and conditions offered carefully.