Applying for a merchant cash advance is relatively easy. But, before applying, it’s crucial to understand the application process, the cost of a cash advance, and what could stop you from qualifying.
Without knowing the application process in depth, you might apply and get rejected, leading to cash flow issues and an inability to invest in business growth.
You'll want to learn how to apply for an MCA to ensure you can access the funding you need when you need it.
This article outlines all the steps you should take when applying for an MCA. It also dives into the reasons why your application could be rejected and what you can do to increase your chances of qualifying.
If you’re ready to apply for a merchant cash advance, click here to start your application now!
What Is a Merchant Cash Advance?
Small business owners might call a merchant cash advance (MCA) a small business loan. But it’s a little different than your typical loan. An MCA is a business financing instrument based on your future credit card sales volume. Many would describe an MCA as a financing solution where a merchant cash advance product offers a business cash upfront. Not just any business, primarily small businesses and particularly retail businesses can benefit from such small business financing solutions provided by a reliable financing company.
Decoding Merchant Cash Advance: How Does it Work?
- Merchant cash advance providers give a business owner a lump sum. -Owners repay this lump sum with a percentage of their debit and credit card sales, a process known as a 'holdback', incorporating it into their card processing merchant account.
- Depending on the repayment schedule, you might repay the borrowed amount daily, weekly, or biweekly. The merchant cash advance company automatically manages these repayment payments.
- Repayment terms are influenced by the factor rate, similar to an interest rate, which is an essential component in the calculation of the total repayment requirement.
- This borrowing cost should be calculated into an APR for better understanding.
An MCA or business cash advance is an excellent funding option for companies that rely on debit card sales and require quick funding for business growth or cash emergencies. Since processing is relatively fast — sometimes on the same day — small business owners can use MCAs to meet pressing cash flow demands. The holdback percentage, the part of daily debit card sales dedicated to repaying the MCA, usually lies between 10% and 20% and remains fixed until fully paid.
This type of business funding relies on Credit card sales, so applying for a merchant cash advance depends on whether your small business accepts debit cards as customer payment. If you only accept cash, you might consider other business financing options, such as business loans or invoice factoring.
Wondering Why You Should Consider a Merchant Cash Advance?
There are several reasons why a small business owner might opt for an MCA, including:
- Resolving temporary cash flow issues: You can get a merchant cash advance in as little as 24 to 48 hours to supplement your cash flow. Essentially, it's a type of same-day funding, providing unsurpassed convenience in securing necessary funds urgently.
- Purchasing inventory on sale: If a piece of equipment or materials your business uses are on sale — but you can't get approved with a traditional business loan — an MCA provides the borrowing power you need to purchase it. This is particularly useful for many small businesses that deal in inventory like retail, restaurant, or e-commerce sectors, to procure supplies when considerable discounts are available.
- Covering unexpected expenses: Small businesses are unpredictable, so a merchant account will help you get quick cash if you have an unexpected or unplanned expense. It adds an element of security by providing a readily available funder during crises.
- Paying back other debts: If you have outstanding small business loans or other types of small business financing, merchant cash advances can help you meet payment deadlines through the pros of fast loan repayment aids.
- Supplementing working capital: If you foresee having an extensive business order in the near future, merchant cash advances, with their inherent ease of borrowing benefits, can help you increase your working capital to boost capacity and deliver the order.
- Getting funding with a low credit score: If your business credit score is low and you don't qualify for a business loan, merchant advance funding, based on your debit and credit card sales data, can help you access the cash you need. Calculations of repayment amount would take into account the factor rate and your monthly card sales.
Pros and Cons of Merchant Cash Advance
An MCA isn’t the best choice for everyone. Look for alternative financing options if:
- You have a good credit profile and can qualify for a business loan with competitive rates.
- You do not accept credit card payments, or most customers pay in cash.
- You expect future sales and credit card transactions to be low.
In these cases, it’s best to rely on other business financing options that better fit your business.
Pro's
- Flexible repayment options attached to future sales
- Revenue based business financing, not based on profit/loss
- Offers business funding despite personal and business credit scores. This emphasizes your company's creditworthiness rather than just your personal FICO scores—an advantage when you have strong sales but less ideal credit. Moreover, with offerings such as a merchant cash advance, there's no minimum credit score requirement, signaling a significant level of leniency.
- Known as accounts receivable financing, you receive a capital advance not based on net profit or loss but on accounts receivables. This method ensures that your borrowings are equivalent to your company's revenue streams down to the last dollar, and accounts for a more accurate reflection of your business's ability to repay.
Con's
- Higher costs and rates than that of traditional bank loans
- Time to repay is typically set for 6 to 12 months to repay
- Costs are not tax deductible because it's a sale of future receivables
The A-Z of Successfully Applying for an Instant Merchant Cash Advance
Small businesses may find themselves strapped for cash at any point in time. Whether you have been a small business owner for a few months or a few years, external factors such as economic downturns or internal factors such as low working capital can make it impossible to continue without a cash boost.
That's where merchant cash advances come in.
The good news is that applying is straightforward and won’t require a lot of paperwork. A merchant cash advance application is easy to fill out, and you could get a better deal than if you were applying for longer-term funding options.
Let's look at the steps you should take to apply for merchant advance funding to increase your chances of qualifying.
Step #1: Finding the Best Merchant Cash Advance Company Near You
Many merchant cash advance companies are on the market, each with fees and repayment terms.
When deciding which provider you want to apply with, find out about the cost of the MCA and the factor rate. This information can help you understand the percentage of your credit card transactions you’ll have to use to pay back the cash advance.
Step #2: Establishing an Account with a Reliable MCA Provider
Most MCA providers have connections to their credit card processors for repayments. Signing an agreement with a credit card processor is a must if you want to apply for a merchant cash advance.
You can skip this step if you already work with an approved credit card processor. Otherwise, create an account with a processor approved by your chosen cash advance provider so you can pay back your MCA through your card sales.
Step #3: Check Your Eligibility
Every merchant cash advance company has its own eligibility criteria. Compared with more traditional small-business lenders, these companies typically offer more flexibility in their eligibility requirements. As a business owner, it’s crucial for you to check if you qualify for a merchant advance and compare the differences between providers. Providers typically look at the volume of your credit card receipts to determine the factor rate—this is where your personal FICO credit scores come into play. A large volume of credit card payments and a good credit score can make it easier for you to qualify and secure a better factor rate. However, even with a low volume of credit card receipts, you might still be able to secure a smaller lump sum.
Step #4: Understanding the Role of Credit Score in MCA Financing
If you apply for a business loan, your credit score will significantly determine whether you qualify or not. You don’t have to have excellent credit to qualify with merchant cash advance providers. However, it’s still essential to know what your score is.
Your merchant cash provider will look at your personal and business credit scores. You’ll be able to apply as long as you have a 550 or higher.
You can get your credit report from one of the business credit bureaus, such as Equifax or Experian. Remember that bad credit won’t necessarily stop you from qualifying for a cash advance, but it will impact your factor rate.
Step #5: Gather Your Supporting Documents
Once you complete the pre-application steps of choosing a provider and credit card processor, it’s time to fill out your online application. As a part of this process business funders are likely to need key documents to finalize the cash advance. Most merchant cash advance providers or funding advisors ensure an easy application form where you can input your personal and business information.
Next, you’ll submit these supporting documents:
- Personal and business bank statements for at least the last six months
- Business bank information
- Proof your business has been running for at least a few months
- Proof of your annual gross sales
- Proof of your agreement with a credit card processor
- Documents that showcase your business’s credit card payment volume
These documents are essential for the lender to confirm that you meet the eligibility criteria, and they also provide the decimal figures that allow them to calculate the exact amount to be repaid. Just as important, the documents demonstrate that you have other means of fulfilling your repayment obligations, ensuring a smooth process for everyone involved. These factors are considered in all aspects of the process, from sanctioning a business cash advance to making sure that you have the facilities to afford the repayment without difficulty.
Step #6: Grasping the Terms and Conditions for Smooth MCA Lending
If you are applying for a merchant cash advance and your application is approved, you should analyze the terms and conditions before signing. Here are some of the key elements you definitely need to understand in the financing application:
- Payment frequency refers to how often you’ll have to repay the lump sum amount of your cash advance from a percentage of your credit card transactions, which could be daily, weekly, or monthly.
- Factor rate is the interest rate for an MCA. It gives an indication of how much money you will need to pay back relative to the lump sum amount received.
- Fee penalties are the penalties you could incur if you miss a payment or default on your MCA.
- Time to funding represents the duration it takes for the lump sum amount to be deposited into your business bank account post-approval of your application.
For example, a factor rate of 1.30 implies that you'll have to pay 30% more than your initial lump sum amount—a crucial point to consider when filling out your financing application for a cash advance. Hence, if you borrow $100,000, you may have to pay back $130,000 by the end of your repayment period.
Consider these elements very carefully. Read the fine print with an expert and decide if you want to proceed with your application.
If the factor rate seems too high, consider requesting a smaller amount for your cash advance or explore different funding options.
MCAs aren’t deemed as traditional loans and hence, aren't subject to strict banking regulations. This could lead to terms and conditions unlike those found in traditional loan products.
While selling a significant portion of your future credit card receipts can solve your short-term cash needs and boost cash flow, in the long run, it could pose a risk to your business assets and its existence.
Step #7: Sign, Seal, and Await Your Merchant Cash Advance Funding
Once you have carefully analyzed the fine print and decided that the repayment terms of your MCA are agreeable, it's time to sign the documents.
After you sign and agree to the terms and conditions outlined by your MCA provider, your funds will be deposited. Then the repayment cycle begins.
Anticipating the Turnaround Time: How Soon Can You Expect a Response?
Most merchant cash advance providers have quick approval or rejection times. You could find out if your application is approved the same day you submit your application. This is especially true for many online MCA providers.
Unpacking the Reasons for Merchant Cash Advance Rejection
Generally, you won’t encounter many issues in getting approval for an MCA, but there are some factors that could lead to a negative outcome. Here are some of the most common reasons why your MCA might be rejected and what you can do about it.
Reason #1: You Have the Wrong Credit Card Processor
If you are already working with a processor that helps you with credit card sales, you have to check if they’re approved by the MCA provider you've chosen to apply with. Most MCA providers have a list of approved processors, and they will reject applicants that don't adhere to their requirements.
If you get rejected because of your credit card processor, change the company you work with to one that is acceptable and try reapplying.
Reason #2: Are Your Transaction Volumes Falling Short for a Merchant Cash Advance?
Your weekly or daily credit card sales might be too low to qualify for an MCA. If that is the case, the MCA provider will reject your application because they don't believe you can pay back your funding.
If this is the sole reason for your rejected application, try to implement a stricter credit card-only payment rule in your business. That way, you’ll be able to decrease the amount of cash-in-hand transactions and increase credit card volume.
Reason #3: Is Your Credit Score Holding You Back from a Business Cash Advance?
Your credit score might be below 550. If it is, you won't qualify for a merchant cash advance.
There are a few immediate actions you can take to improve this score, but to create a significant boost, you’ll need time.
You can consolidate your debt to make it more manageable and commit to making on-time payments. When you do this, your score will increase over time, and you should see at least a slight improvement in a few months. In the meantime, you can ask friends and family for temporary help to supplement your cash flow.
Once your score is higher and you’ve done everything you need to qualify, you can fill out your application for a merchant cash advance!
Exploring Alternatives to Merchant Cash Advance for Startups and Small Businesses
There are alternatives to applying for a merchant cash advance that you may want to consider first but keep in mind that these alternatives have higher credit standards and require more financial documentation to qualify. Included in these alternatives are options particularly beneficial for the small business borrower.
- Small Business Loan- Business term loans, available from banks and online credit lenders like OnDeck and Fora Financial, feature interest rates starting at 9% with fixed rates and terms that range from 12 to 60 months.
- Business Line of Credit- This is a revolving credit facility with a credit limit that has a draw on demand feature unlike term loans. Simple interest is only charged on the outstanding balance. Interest rates start at 1% per month simple interest, making this a good option if your business has steady revenue.
- Small Business Administration (SBA) loans- SBA loans have the best rates and terms in business lending but come with strict credit requirements and voluminous amounts of paperwork to get approved. Their focus is on your business's profitability, rather than time in operation or credit score. However, eligibility and approval can be a challenge.
Frequently Asked Questions
How To Calculate Merchant Cash Advance Rate
A merchant cash advance has a factor rate which is a fixed cost factor and not and interest rate which is simple interest. You take the purchase price (Payback amount) divided by specified amount (Funded amount) equals Factor rate. The cost between your advance amount and your payback amount is you cost of business funding.
Example.
Advance amount $20,000, Payback amount $25,000
$25,000 divided by $20,000 = 1.25 Factor Rate
$25,0000 - $20,000 = $5,000 flat cost of business funding
Can I Get a Merchant Cash Advance With Bad Credit?
Unlike traditional business financing, a merchant cash advance allows for businesses who have bad credit or some type of credit impairment. Your terms will be impacted by credit and will determine factor rate and estimated time to repay impacting costs and payments.
What is the Average Rate & Cost Of A Merchant Cash Advance?
The average factor rate and costs of a merchant cash advance ranges from 1.18 to 1.35 of the funded amount. Origination fees range from 0% to 6%.
Conclusion
A merchant cash advance is an excellent short-term funding option for businesses with a large volume of credit card payments. Offering cash upfront, it can be instrumental for procuring new inventory, ameliorating cash flow, supplementing working capital, and making vital investments that will bolster business growth. If you're interested in finding MCAs and other business funding options, consider leveraging a small business funding marketplace. Endorsed by business advisors, these platforms enable you to swiftly compare options and glean crucial information for making intelligent decisions.
AdvancePoint Capital, in conjunction with teams of expert Business Finance Advisors, assists businesses in identifying optimal funding options based on their specific profiles. Apply in mere minutes, view multiple financing options informed by a broad lender network, and secure funding in as little as 24 hours.
