The Merchant cash advance (MCA) method of lending has gained popularity for the past few years. This product originally came in as a remedy to fund future or upcoming credit card sales but has now evolved into financing that allows any business to finance their future sales—regardless of what they sell.
What’s a cash advance loan?
The thought behind merchant cash advances is that a business sells its future sales and gets instant financing. And because of its short-term nature, repayment happens in a matter of months.
Payback often starts straight away. The lender either deducts an agreed portion of your company’s ongoing sales, or debits your merchant account each business day. This structure makes the product more of a short-term business loan than a normal line of credit.
How the funding amount is worked out
The cash advance vendor determines the amount to advance your business by looking into your history of sales— they either review your record of credit card transactions or go through your corporation’s bank statements.
Many money advance companies offer anything between 80 to 150 percent of a business’ average sales per month. However, the amount varies from one provider to the next. Plus, it depends on the financial capability of your business.
How the payback amount is calculated
The payback amount lies anywhere between 9 to 50 percent more than the amount advanced. Cash advance vendors refer to this amount as the factor (ranges from 1.09 -1.50). Then, the repaid amount is determined by multiplying the amount advanced by the factor.
Because they only last 3 to 15 months, when calculating the APR you should take into consideration both the settlement term and the factor. As you’ll realize, they obviously have a higher APRs than standard business loans.
Repaying a cash advance is more or less like when you’re settling a term loan. You enjoy the advanced amount upfront then you start in on making regular paybacks as planned until you clear all outstanding balances. So when the bank says NO, turn to an MCA provider.
Business Funding expert, Nathan Hale, founded First American Merchant with his eyes set on helping the backbone of our country, small business owners. His passions include writing/producing music, and travel. First American Merchant is America’s Merchant Cash Advance Company, serving both traditional and high-risk Businesses