How Merchant Cash Advances Support Owners with Bad Credit

How Merchant Cash Advances Support Owners with Bad Credit

2024.06.10

One of the most significant aspects of managing a small or medium-sized business (SMB) is getting finance for multiple business functions. However, obtaining standard bank loans can be challenging. It becomes highly difficult for owners with poor credit. 

This is where merchant cash advances, or MCAs, become better substitutes of traditional financing options for credit-seeking businesses. In fact, a significant 10% of small businesses in the US that sought financing in 2021 turned to MCAs, marking a notable increase from 7% in previous years. 

This blog will explore how MCAs can be a valuable tool for SMB owners struggling with bad credit, outlining the process, benefits, and considerations for utilizing this financing option. With approval rates for MCAs hovering around 70%, compared to the declining approval rates for traditional loans, MCAs offer a more flexible and accessible means for businesses to secure the capital they need to thrive. 

Understanding Merchant Cash Advances: Make Informed Decision

A merchant cash advance is a financing option specifically designed for businesses that process daily sales as part of their credit card payments. It’s not a traditional loan but rather an advance on a portion of your future sales. This is how it works:

  • Application and Approval: You apply for an MCA with a provider, presenting your recent business’s bank statements and credit card processing history. Approval for MCAs often hinges more on the cash flow of your business than your credit score.
  • Receiving the Funds: If approved, you receive a lump sum of cash upfront.
  • Repayment Process: Repayment is tied to a percentage of your daily credit card sales, automatically deducted by the MCA provider until the advance, plus fees, is fully repaid.

Benefits of MCAs for Businesses with Bad Credit

For SMB owners with bad credit, MCAs offer several advantages:

  • Easier Qualification: Unlike traditional loans, MCAs focus more on the financial health of your business, particularly your processing volume, rather than your credit score. This makes them a more accessible option for companies with a credit blemish.
  • Fast Funding: The application and approval process for MCAs is often quicker than traditional loans, allowing you to access capital rapidly to address immediate needs.
  • Flexible Use of Funds: The funds from an MCA can be used for various business purposes, such as inventory purchases, marketing campaigns, or equipment upgrades.

Things to Consider Before Applying for Merchant Cash Advances

While MCAs offer a lifeline for businesses with bad credit, it’s crucial to understand the following:

  • Cost: MCAs have higher effective costs than traditional loans. These costs are often structured as a ” factor rate” rather than a traditional interest rate. Be sure to thoroughly understand the factor rate and calculate the total cost of repayment before entering into an MCA agreement.
  • Repayment Terms: MCA repayments are tied to a fixed daily percentage of your sales, which can strain your cash flow during slow sales periods. This is particularly true for businesses that encounter seasonal sales volumes. 
  • Impact on Credit Score: While MCAs don’t directly affect your credit score, missed or late payments can be reported to credit bureaus, potentially harming your creditworthiness.

Making an Informed Decision for Your Business

MCAs can help businesses with bad credit. But it’s crucial to consider their pros and cons. Here are some key considerations:

  • Explore all Funding Options: Compare MCAs to other financing options, such as lines of credit or invoice factoring, to determine the most cost-effective solution for your specific needs. It’s noteworthy that while 10% of small businesses sought MCAs in 2021, the pursuit of loans and lines of credit decreased dramatically from 89% in 2020 to 72% in 2021.
  • Understand the Terms: Before signing the agreement, fully comprehend the factor rate, repayment terms, and any additional fees associated with the MCA. Remember, only 71% of business owners who apply for an MCA actually get approved, and the terms can vary significantly based on your risk profile and sales volume.
  • Maintain Good Cash Flow: Ensure your business has a consistent sales volume to comfortably accommodate the daily MCA repayments without hindering your cash flow. This is crucial as over 50% of companies who received an MCA in 2019 renewed their advances before they were due, indicating the need for a solid financial strategy to manage repayments.

By considering these factors and the associated statistics, you can make a more informed decision about whether an MCA is the right choice for your business.

Conclusion

Knowledge of the merchant cash advance elements allows lenders to customize your application for maximum success. Showcasing a solid processing history, a well-defined plan for the use of funds, and evidence of financial stability can help you gain MCA clearance criteria.

MCAs are a financial tool that, when used wisely, may help your company grow.

FAQs

  1. Do I need good credit to qualify for a merchant cash advance?

A: While personal credit score is a factor, MCA providers place greater emphasis on the financial health of your business, particularly your processing volume of credit card sales.

  1. How quickly can I receive funding with a merchant cash advance?

A: The approval process for MCAs is often faster than traditional loans. In some cases, funding can be received within days of approval.

  1. What are the repayment terms for an MCA?

A: Repayment is tied to a fixed daily percentage of your credit card sales, deducted automatically until the advance and fees are fully repaid.

  1. Can a merchant cash advance improve my business credit score?

A: On-time repayments for MCAs may not directly impact your credit score, but responsible repayment practices can help build a positive business credit history.

  1. Are there any alternatives to merchant cash advances?

A: Alternative financing options for businesses with bad credit include invoice factoring, lines of credit from alternative lenders, or crowdfunding.

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