Securing funding for your small or medium-sized business (SMB) is crucial for growth and navigating unexpected financial needs. While traditional bank loans are a standard option, their lengthy application process and strict credit score requirements can be hurdles.
This is where merchant cash advances (MCAs) come into play, offering a faster and more flexible alternative. In 2022, only 7% of small businesses in the US applied for MCAs. But surprisingly, the approval rate was high, with 90% of applicants receiving some amount of capital.
In fact, the approval rate for MCAs has increased from 84% in 2020 to 90% in 2022, indicating a more favorable outlook for potential borrowers.
Here, we delve into the MCA approval criteria lenders evaluate, which are less about credit scores and more about the robustness of your business’s sales and future revenue potential.
Financial Health and Stability
To ensure financial health and stability, Merchant Cash Advance (MCA) providers evaluate key business metrics.
Here’s how they determine eligibility:
- Minimum Time in Business: Most MCA providers prefer businesses that have been operational for at least six months to a year. This demonstrates a track record of generating sales and establishes your business as a viable entity.
- Monthly Revenue: Consistent and predictable revenue streams are key. A healthy monthly revenue shows your ability to repay the advance without financial strain. The specific minimum requirement varies by lender, but many look for businesses generating at least $5,000 per month.
- Strong Processing History: Lenders assess your business’s ability to repay based on your past credit card processing history. They request three to six months of bank statements or credit card processing statements to analyze your average sales volume.
Imagine you run a restaurant with an average monthly revenue of $15,000. Your credit card processing statements show an average monthly sales volume of $12,000.
An MCA lender might be comfortable providing you with an advance of $30,000, with repayment occurring through a percentage deduction from your daily sales receipts.
Beyond these core criteria, some lenders may consider:
- Industry: Industries with predictable cash flow patterns, like restaurants or e-commerce businesses, might be more favorable. In fact, cash flow lending is particularly beneficial for businesses that can show consistent cash inflows, as it focuses on a company’s operational performance and future cash flow projections to determine creditworthiness.
- Business Credit History: A positive business credit history can strengthen your application, though it can sometimes be a deal-breaker. Most lenders consider a credit score of 660 or more as a good credit score, indicating high loan repayment capacity with minimal chances of default.
Understanding Your Business Needs to Find the Right Solution
Transparency regarding your funding needs and how you plan to use the merchant cash advance funding is crucial.
Communicate your goals, whether it’s covering inventory costs, expanding marketing efforts, or bridging a cash flow gap. By understanding your needs, lenders can assess the feasibility of your repayment plan and determine if an MCA is the right fit.
Checklist of Documents Required to Build a Strong Application
To present a compelling case, gather the necessary documents beforehand. This includes:
- Business bank statements (past 3-6 months)
- Credit card processing statements (past 3-6 months)
- Tax returns (personal and business, if applicable)
- Essential business formation documents (license, permits, etc.)
By presenting a well-organized application with the requested documentation, you can demonstrate your preparedness and professionalism, increasing your chances of approval.
Conclusion
Understanding the merchant cash advance factors lenders consider empowers you to tailor your application for success. By demonstrating financial stability, a strong processing history, and a clear plan for utilizing the funds, you can increase your chances of obtaining MCA approval criteria.
You must remember, MCAs are a financial tool, and using them strategically can propel your business forward.
FAQs
1. Can I still qualify for an MCA with bad credit?
A: Traditional loan applications rely on credit scores. However, MCA lenders focus more on your business’s overall financial health and future sales potential.
Even with bad credit, you might qualify for a merchant cash advance if your business demonstrates consistent revenue and a strong processing history.
2. What are the repayment terms for a MCA?
A: Repayment terms for MCAs typically involve daily or weekly deductions of a percentage of your credit and debit card sales.
The specific percentage and duration of the repayment period varies depending on the lender and the advance amount.
3. What is the cost of a merchant cash advance?
A: MCAs have a higher effective cost than traditional loans. This is often reflected in factor rates, which can range from 1.1 to 1.5 or even higher.
Consider the price of a merchant cash advance and weigh it against the benefits before applying.