Taking Care of Short Term Cash Needs
Unexpected equipment repairs or payroll cash flow gaps can drive many businesses to need short-term cash solutions provided by a merchant cash advance. But, qualifying for an MCA may be more complicated than most people think. Giving the company the best possible shot at qualification will require some preparation, and this includes keeping the credit score of the business in a healthy range.
A merchant cash advance is not a loan and is not structured to be repaid like a conventional loan. Instead, the advance operates as a business transaction where a lump sum of money is exchanged for future earnings down the road. Typically, the funds are received via direct deposit to the bank account of the business. Payments schedules can vary according to terms but generally are either weekly or daily.
How the Advance is Repaid Car Vary
With some payment structures, the payments are made through a system holdback, where an agreed-upon percentage of card transactions is removed from the business account either daily or weekly. Since these payments are percentages, the amount of each payment will vary depending on the total amount of card sales. Since each payment will vary, so will the amount of time it takes to repay the advance.
Other times, the payments will be a fixed amount each day, regardless of daily sales volume. The actual amount of these payments is based on an estimate of the monthly revenue.
A Healthy Credit Score Can Help
Earlier, the business's credit score was discussed concerning qualification for a merchant cash advance, and here's where that comes in handy. Both the credit score and the risk assessment will be used to determine the factor rate, and the factor rate is what the provider will use to determine the amount necessary to repay the advance.
Putting it simply, a factor rate of 1 would be the amount of the advance, say $10,000. A factor rate of 1.5 would mean a repayment on the initial $10,000 advance of $15,000. Factor rates typically run between 1.2 and 1.5. The lower the number, the faster the repayment and the less it will cost.
Advantages of a Merchant Cash Advance
There are some advantages to obtaining a merchant cash advance. The influx of funds can come in handy during slow times or seasons, and the cash is typically placed in the business account in a few days providing quick access to needed money. MCA's also don't require collateral, eliminating the need to put business assets and equipment at risk.
Make Sure to Understand the Terms Completely
Merchant cash advances are not subject to federal oversight and are structured as commercial transactions, which means that the interest in the initial advance can add up very fast. A thorough review of the contract beforehand is crucial to ensure that all terms are completely understood.
Due to the somewhat unconventional way they are structured, MCA contracts can be challenging to understand and compare to other options. Ensure that the provider can and does answer all questions to your complete satisfaction and understanding before signing anything.