Definition of Merchant Cash Advance.
It is a financing solution that offers small businesses and retailers a cash advance against sales to be made by the firm in the future.
The business has to have a record of good sales. The retailers receive a certain amount of money from a lender, and after making sales to their customers, the business pays back as per the agreed percentage.
It is also known as a Business Cash Advance.
Pros of MCA
1-Needs no collateral.
These loans are not secured and hence come in handy to businesses with little assets.
All that is needed is proof of previous sales and signs of making more sales in the future.
2-Quick and Easy Application.
A business can get the cash advance in less than two working days. Whether good or bad, your credit history does not affect your chances of getting a cash advance.
1-High interests rates.
High interests rates are the primary cause of concern for this type of funding. The loans come at very high-interest rates. If the business fails to make sales and prolongs the repayment period, the interests keep rising, burdening the retailers.
2-Need to change merchant processors.
Payments are made after-sales. The systems might have to be changed to be incorporated with the lender’s procedures.
Alternatives To Merchant Cash Advance.
1-Small Business Administration Loans.
These are small loans given by lenders to small businesses. The loans are guaranteed by the U.S government and subject to their respective interest rates and regulations.
Small Business Administration loans, offer financing help to retailers who may find it difficult to access other forms of funding to run their businesses.
Types of SBA loans:
- Disaster recovery loans.
- Real estate loans.
- Equipment loans.
- Small short-term loans.
- General loans.
Because of the reduced risk offered by the U.S government to the lenders, the SBA loans offer favorable fees, rates, and terms to their borrowers.
This form of financing is commonly known as Accounts Receivable Financing.
Businesses can access this type of loan by offering the value of unpaid customers’ invoices as security or collateral. The funds are extended as a form of a line of credit or a loan form.
When extended as a loan, the borrower receives 80% of the value of the invoices as an upfront.
Extended as a line of credit, the amount credited depends on the value of all unpaid invoices in the business.
The business is charged an amount based on what they spend.
This type of financing solution is primarily used to pay for goods such as vehicles or machinery.
- Equipment leases.
- Equipment loans.
Factors that determine the amount of funding a business will receive depends on:
- Equipment value.
- Qualifying requirements.
In other cases, a business may receive the total amount of the machinery value. If the funding leaves the lender at high risk, the company may be required to make a down payment.
The funds cant be used for any other purpose rather than purchasing the pieces of equipment or machinery. The kit itself acts as security, and failure by the business to repay the agreed amount, the lender, seizes the gear.
4-Private Investment Loans.
They are provided by investors or non-bank institutional money lenders who wish to make money by offering loans to small businesses and making profits from the interests paid back.
They are mostly affordable and paid over long periods hence convenient to small businesses.
They are also known as supplier credit or trade credit. Retailers are not required to provide an upfront for the goods they sell. The suppliers give the business owners a period ranging from 30 days to 90 days to clear the debt.