Cash flow is king in the world of small and mid-sized businesses. Cash is vital to maintaining inventory, paying suppliers, and growing the business. With the recession putting a damper on credit markets, businesses are looking elsewhere for cash. The new solution: merchant cash advance.
Merchant Cash Advance: the Basics
A merchant cash advance (MCA) offers an alternative source of business funding to entrepreneurs who lack the credit rating or collateral to secure a commercial bank loan. Unlike a loan, merchant cash advance funding is the purchase of a portion of a business future credit card sales at a discount. Businesses benefit from a lump sum paid at the outset of the agreement. In return, the MCA provider buys the right to retrieve a portion of the business credit card sales each month--usually around eight percent of total receipts.
Key Advantages of a Cash Advance
Merchant cash advance funding offers an attractive alternative to business loans. Benefits include:
- No Credit or Collateral at Stake. A merchant cash advance is a safe approach to accessing cash. Whereas commercial loans can affect a business credit rating, a merchant cash advance is a sales transaction and therefore stays off the credit report. Merchants who take a cash advance also avoid the risk of losing collateral, a common issue in commercial loan default situations.
- Easy Application and Collections Process. Merchant cash advance funding is a painless, straightforward process from start to finish. Commercial lenders evaluate financial statements, tax returns, and business plans. Merchant cash advance providers consider only two simple criteria: monthly credit card returns and length of time in business. Typical minimums are $5000 in monthly credit card sales and nine months in business.
- Quick Access to Cash. Because there is so little paperwork to process, merchant cash advances offer a fast turnaround. While commercial loans can take weeks or even months to process, MCA funding is typically available within a week of submitting the application. This instant response can be an important asset if the business needs immediate funding to pay off a creditor or seize an unexpected opportunity.
- High Approval Rate. MCAs rely on real business performance rather than credit to evaluate applicants. This pragmatic approach allows any stable business to qualify for an advance. Advance amounts typically depend on the business average monthly revenue in the previous year.
- Revenue-Based Collections. "We get paid only when you get paid," claims a leading MCA provider. The slogan captures one of the most compelling advantages of a merchant cash advance over a commercial loan. While the loan requires a fixed monthly payment, MCA collection amounts fluctuate based on the merchants sales volume. In flush months, the MCA retrieves a higher monthly sum; in lean times, the MCA scales back its share proportionally. This percentage-based collection policy allows the MCA to support the business success rather than draining its funds.
Commercial loans are a valuable source of long-term, low-interest business funding. But when a merchant needs a quick, safe cash infusion, cash advances offer an attractive alternative. Since the MCA provider collects only a percentage of returns, businesses avoid the pain of default during the inevitable sales lulls. Merchant cash advances offer businesses the flexibility to negotiate the ups and downs of todays dynamic economy.