Merchant Cash Advance Loan and Whether You Should Take It

what is a merchant cash advance loan

Merchant cash advance loans were originally a type of financing for small businesses. The business owner receives a lump-sum payment which they can pay using their credit card or debit card sales. 

The term, however, now refers to any type of financing structure that does not have a fixed term for repayment. Unlike traditional bank loans, the repayment plan could be done daily, weekly, or bi-monthly. 

A merchant cash advance, which is sometimes referred to as MCA, is ideal for small businesses that need an immediate source of cash or capital. Nonetheless, small business owners should make it their last resort when looking for financing because of its high annual interest rates. 

How Does a Merchant Cash Advance Work?

Despite the term, merchant cash advances are not loans. Rather, you are giving the merchant cash advance provider authority over your future sales, including the interest rate. The agreement between provider and business owner includes the advance amount, repayment amount, and the holdback.

There are two types of repayment plans for the MCA:

  • Fixed withdrawals 
  • Debit or credit card sales percentage

Fixed Withdrawals

In this repayment method, the MCA provider can directly debit a fixed amount from your bank account. The amount is based on the estimated sales you make every month, and the deduction is done on a daily or weekly basis no matter your sales. 

The advantage of this repayment method is that you can anticipate how long it will take you to pay back your advance loans. Thus, the method works best for businesses that do not depend solely on debit or credit card sales 

Credit or Debit Card Sales Percentage

This is the most common type of repayment method for a merchant cash advance. Here, the merchant cash advance provider automatically debits from your credit or debit card sales daily or weekly until you paid the advance loans in full. 

Compared to other business loan types, merchant cash advances do not have fixed repayment terms. Instead, the repayment periods depend on the sales you make; thus, it can last between three to 18 months. In other words, if your credit card sales are high, you’ll be able to pay back your cash advance faster. On the other hand, if your sales are low, it could take you much longer to repay the merchant cash advance company. 

How to Apply for a Merchant Cash Advance 

If you are looking for an immediate source of funding, the merchant cash advance might be for you. Before you start your application, you need to know whether you qualify or not. 

Although you don’t need any collateral for this cash advance type, you must show proof that your business is generating an annual revenue between $150K and $200K. Additionally, you must have been in operation for at least a minimum of 18 months and have a credit score of at least 550. 

Once you know you’re qualified, you must have the following documents ready:

  • Credit card processing statements
  • Voided business checks
  • Bank statements
  • Driver’s license
  • Business tax returns

You also need to prepare a letter requesting a cash advance. In the letter, you must indicate the reason why you need an MCA, how much you’re borrowing, and how you intend to pay for it. Here are more details on how to write letter for request cash advance from company. It contains information about the nitty-gritty of getting a merchant cash advance. 

Merchant Cash Advance Rates and Fees

Merchant cash advance fees are called factor rates, which are usually calculated using the following data:

  • Number of years in business
  • The industry you’re in
  • Your credit score
  • Business financials
  • Credit or debit card transactions

Factor rates are usually between 1.1 and 1.5. To calculate how much your merchant cash advance costs, multiply the amount you received by the factor rate.

Let’s say you received $10,000 with a 1.5 factor rate, you will incur $15,000 in fees. So your total repayment amount is $25,000. Additionally, if you want to get the total cost, you should calculate the factor rate and the additional fees. It will also give you an idea of how long you’re going to repay the cash advance. 

How to Become a Merchant Cash Advance Broker

There’s an income opportunity to become a merchant cash advance broker. Discover how to start a cash advance loan business with ease. You can find a lot of free video tutorials about it on the internet. 

If you’re really keen on this type of business, the first thing you need to remember is to find your ideal client. Start with what you have and ask yourself, does the target audience you have in mind need what you are offering? Next, you need to acquire a license and a certification as an MCA provider. You also need to know what your state legislation is regarding how to get an instant cash advance loan in the USA.

Merchant Cash Advance Loan and Whether You Should Take It

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