Have you ever found your business in need of a financial boost to seize an opportunity or overcome a hurdle? You’re not alone.
In fact, 58% of small businesses have sought out Merchant Cash Advances (MCA) for their speed and flexibility. According to a recent study by Debanked, an astounding 75% of small businesses consider alternative funding options, with Merchant Cash Advance (MCA) being a popular choice.
But like any financial decision, it comes with its own set of trade-offs. Before you leap, let’s explore the ins and outs of MCAs to ensure it’s the right move for your business.
What is Merchant Cash Advance (MCA)?
A Merchant Cash Advance provides businesses with a lump sum of cash in exchange for a portion of future sales. It’s a viable option for businesses seeking fast funding without the lengthy approval process of traditional loans. MCA loans are particularly beneficial for businesses with high credit card sales but require quick cash to seize growth opportunities or manage cash flow.
Pros and Cons of MCA
The following are the pros and cons of an MCA.
Pros:
- Quick access to funds
- No need for collateral
- Flexible repayment terms based on sales
Cons:
- Higher costs compared to traditional loans
- Daily or weekly repayments can strain cash flow
Cost of Merchant Cash Advance for Small Business fundings (MCA)
Understanding the cost associated with a Merchant Cash Advance (MCA) is crucial for any business considering this financing option.
Unlike traditional loans, which have an interest rate, MCAs use a factor rate to determine the cost. This rate, typically ranging from 1.1 to 1.5, is multiplied by the advance amount to calculate the total repayment amount.
For instance, an MCA of $10,000 with a factor rate of 1.3 would result in a total repayment of $13,000.
The factor rate system can lead to high annual percentage rates (APRs), especially when the advance is repaid in a short period. APRs for MCAs can soar well above traditional loan rates, sometimes reaching triple digits.
This is because the APR not only accounts for the factor rate but also includes additional fees such as origination fees, closing costs, and servicing fees that lenders may charge.
For businesses, this means that while MCAs provide quick access to funds, they come at a premium. The speed and ease of obtaining an MCA should be weighed against the higher cost of capital.
It’s essential to review the terms carefully and consider the impact on your business’s cash flow. Platforms like FunderIntel offer detailed breakdowns of these costs, allowing business owners to make informed decisions.
Moreover, the repayment structure of an MCA, which typically involves daily or weekly deductions from a business’s credit card sales, can further affect the overall cost. As these deductions are a fixed percentage of sales, the actual APR can fluctuate based on business revenue. During periods of high sales, the advance may be paid off more quickly, but the effective APR will increase as a result.
The cost of an MCA can vary widely. Typically, providers charge a factor rate, which can translate to high annual percentage rates (APRs).
Alternative Lenders for Small Business
With banks tightening their lending criteria, alternative lenders for small business have emerged as a beacon of hope. These lenders offer short term loan options and cash flow business solutions, making them a top choice for small business merchant cash advance services.
Conclusion
Merchant Cash Advance (MCA) offers a swift and flexible funding solution for small businesses. While it comes with higher costs, the speed of access to capital makes it a compelling option for many.
As the top merchant cash advance companies continue to innovate, it’s clear that MCAs will remain a staple in small business funding.
FAQs About MCA
Q: How quickly can I receive funding from an MCA?
A: Most businesses can receive funds within 24 to 72 hours after approval.
Q: Are there any restrictions on how I can use the MCA funds?
A: Generally, there are no restrictions, allowing businesses to use the funds for a variety of needs.
Q: How does repayment work with an MCA?
A: Repayments are made through a percentage of daily or weekly credit card sales, providing flexibility with fluctuating revenues.
Q: Can an MCA impact my business credit?
A: Since MCAs are not traditional loans, they typically do not help build business credit.
Q: What is the main advantage of using an MCA over a traditional loan?
A: The main advantage is the speed of funding and the flexibility in repayment terms.