07 Oct What is a Merchant Cash Advance?
A merchant cash advance is a type of funding that enables organizations to sell a fraction of their future sales in exchange for instant payment. The funds allow the firm to cover operational expenditure and develop at a fast rate.
Primarily, merchant cash advances were exclusively used to fund credit card sales. For this reason, most MCA clients were restaurants and retailers. The service has since evolved to accommodate any future sales. Merchant cash advance companies, in modern times, no longer consider how the future sales are paid.
How does the Product Work?
Most of the MCA companies deem this financial product to be an acquisition of possible sales in the future as opposed to credit funding. So as to determine the amount of funding to offer, the merchant cash advance establishments peruse through your firm’s commercial sales, credit card sales, bank statements, and other important information. Such data is important as it gives the MCA Company a reflection of your sales performance. This information is vital since it furnishes the MCA entities with an impression of your firm’s future sales performance.
Determining your Funding Amount
The net funding advanced to your firm is calculated and determined by the apparent risk of your business and possible future sales. Most of the merchant cash advance establishments fund up to 150 percent of your firm’s average revenue based on the aforementioned parameters.
The amount that you will have to pay back is calculated by multiplying a return factor by the amount that was advanced to you. The return factor often ranges between 1.09 and 1.50. For instance, a transaction worth 100,000 US dollars with a return factor of 1.09 would warrant a repayment figure of about 109,000 US dollars over a pre-determined period of time. In most cases, the payback period ranges between three months and five months.
The actual transaction is quite basic. The funds are sent to your firm’s account once the funding is approved.
Paying Back the Money
Your firm can pay back the cash advance through multiple channels. If, for instance, the MCA company funded credit card revenues, your firm should pay the money back through a small percentage of your organization’s daily sales.
This percentage, also referred to as the retrieval rate, often ranges between eight percent and 13 percent of your company’s daily revenue. The funds are transacted by employing split processing with the credit card provider.
In the event you are not funding credit card sales, repayment is achieved by allowing the merchant cash advance entity to deduct some money from your company’s bank account via the direct withdrawal system. In this light, some MCA companies are also known as ACH loans.
Disadvantages and Advantages of Merchant Cash Advances
Merchant cash advances are not free of some shortcomings. The main drawback of this service is the net cost of financing. As shown previously, this product is quite expensive. Consequently, organizations ought to use this service only after prolonged consideration, and only if they believe in the ability to repay the lender.
However, this product has some advantages. Most cash advances are approved and transacted within days. Additionally, qualifying for a cash advance is easier as compared to qualifying for a business loan. These advantages often render merchant cash advances attractive only if your firm has an urgent need for immediate financing.
Given the highlighted advantage and disadvantage of this financial product, firms should consider consulting an accountant to ensure that they make the right decision.