An MCA or merchant cash advance is a type of financing enabling businesses to sell part of their future earnings for an immediate payment. This enables the business to grow and pay their operational expenses. The means of paying for the financing is dependent on the type of business.
The majority of businesses consider an MCA a payment for future sales as opposed to a loan. The amount of funding provided is determined by reviewing information such as bank statements, commercial sales and credit card sales. This establishes sales potential by providing sales performance details.
The Funding Amount
A combination of the perceived risk and the sales are used to determine the amount of funding. The majority of companies will advance between 80 and 150 percent of the businesses average monthly income. The amount the business must repay is calculated by multiplying the return factor with the amount financed. The return factor is usually between 1.09 and 1.50. This means if the payback factor is 1.09 and the transaction amount is $100,000, the business must pay back $109,000. This must generally be done within three to fifteen months. Once the financing has been approved, the funds are deposited into the businesses account.
Repaying the Funds
There are several ways the business can pay back the money. If the funding was derived from credit card sales, the payback is a percentage of future daily sales. This is called the retrieval rate. It is usually between eight and thirteen percent of the daily sales. The company providing the financing may use a direct withdrawal system to deduct the funds from the businesses bank account. This is often called an ACH loan. Most companies make this deduction weekly.
The biggest disadvantage is the cost the business pays for financing. This is the reason a business will not apply for a merchant cash advance without careful consideration. The business must be fairly certain the funding will enable them to grow the business and pay back the lender. Cash advances also have a fixed value similar to a term loan. This is generally not the right solution for solving difficulties pertaining to the cash flow. A Los Angeles merchant cash advance loan will offer a temporary solution for cash flow issues, but usually needs to be refinanced numerous times. A line of credit is a better solution when the issue is the cash flow.
There are numerous advantages with an MCA. The business can obtain the cash in just a few days. It is also easier to qualify for an MCA than a standard business loan. When the business needs funding urgently, an MCA is an excellent solution. It is important to look at both the advantages and the disadvantages prior to applying for a merchant cash advance.
The SBA Microloans
There are a couple alternatives to an MCA. The first is an SBA Microloan. This can provide a small business with $50,000. Despite the fact this type of loan does not demand good credit, there are disadvantages. It is much more difficult to be approved for this type of loan than an MCA. An SBA Microloan is also more complicated, requires a lot more information regarding the business and can take a long time for approval.
Invoice factoring can only be obtained if the business is selling their services or products to other companies. The biggest issue is commercial loans are generally approved using thirty to sixty day terms. This often created difficulty with cash flow. An MCA is a much simpler, easier and more time effective solution