A merchant cash advance (MCA) is a financial option providing small businesses with needed funds. In return, businesses give MCA providers a portion of future receivables or sales at a discount.
How Does a MCA Work?
MCAs are quick cash solutions. Unlike a bank loan, you can apply for an advance and receive funds within 24 hours. Unlike lending companies, MCA organizations are not bound by federal restrictions. They do not ask for collateral.
When you apply for a MCA, approval depends on the most minimal requirements. This is why, unlike a loan, you can receive a cash advance quickly. And unlike a loan, companies expect a cash advance to be paid in full in a few months.
MCAs have a factor rate, a decimal figure based on the total advance amount. How this differs from an interest rate is that the factor rate is an interest cost. You calculate interest rates for the life of a loan. Factor rates are charged to principal in full at the origination of the advance.
Why a MCA?
Loans have a long process to approval. MCAs are a quick funding solution. They come in handy if the business has an urgent matter that can’t wait for bank approval.
A MCA’s helpful if you’re having a cash flow problem. Use them to restock inventory or buy a needed piece of equipment. They’re the option if your business is subject to seasonal fluctuations.
There are pros that come with using MCAs. They have a high cost, but if these criteria fit the situation, they’re the ideal solution.
- Quick funding
- Minimal paperwork
- No need for perfect credit
Another top pro for MCAs is payments can change depending on company success. If repayment based on sales percentages, repayment of the advance can adjust if you’re doing well.
Lantern Credit, a lender comparison site, says cash advances come with their cons, but “there may be times when it’s the right choice for your business.” In that regard, let’s take a look at some disadvantages.
- No advantage to paying off early
- No government oversight
- Doesn’t build credit
Applying for a MCA
Unlike a bank loan, getting a MCA requires almost no work. Find a company online and fill out their application. You’ll only need basic info like SSN, FIN and contact information. Some companies may want to see credit transactions, business bank statements or tax returns.
The approval may take less than 24 hours or a few days. A company may request you establish a credit card with a MCA partner. Others will send the funds straight to your account.
When it’s time to improve your cash flow, be sure to investigate your options. Research cash advances and compare small business loans. Lantern Credit has the tools for finding the right financial instrument for your needs with a single application.