10 pros & cons of merchant cash advances for small businesses
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10 Pros & Cons of Merchant Cash Advances for Small Businesses
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WHAT IS A MERCHANT CASH ADVANCE (MCA)?
• Popular alternative to traditional small business loans. • Provide needed capital to small businesses. • Are a cash advance against future credit card sales. • Paid back by fixed portion of credit card revenue.
But what do the details look like?
View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses .
KEY TERMS USED IN A MCA DEAL
Advance amount – actual cash in hand that goes into the business owner’s bank account. This money can be used to buy equipment or cover payroll. Factor rate - is the number that sets the total amount the business owner has to pay back for the MCA. Retrieval rate - fixed percentage taken out of credit card sales to pay back the MCA.
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Let's say a restaurant needs to upgrade some kitchen equipment. Restaurant owner “Richie” enters into an MCA deal. His advance amount is $50,000. So he has $50,000 to spend on the new kitchen equipment. The factor rate on his MCA deal is 1.3 (factor rates generally range between 1.12 and 1.5). That means restaurant owner Richie will have to pay back $65,000 (50,000 x 1.3 = 65,000). He agreed to a retrieval rate of 10%. If he does $2,000 a day in credit card sales, $200 of that will go to his MCA lender until he pays off the full $65,000 ($2,000 x 0.10 = $200). Retrieval rates can range between 5% and 15%.
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PRO 1. Available to people and businesses with bad credit
An MCA looks forward to future sales, not backwards. So a bad credit rating, which is based on past history, isn't relevant to the lender. This is why MCAs have higher approval rate than small business loans
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PRO 2. Merchant Cash Advances
are easier to qualify for overall
Depending on the advance amount sought, the variables of average amount of monthly credit card sales over what period of time will vary. What could disqualify you from an MCA deal? Having a prior bankruptcy, not currently processing credit card sales or enough in credit card sales, or being in business less than six months.
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PRO 3. Applying for an Merchant
Cash Advance is simple
MCA requires much less documentation and takes less time than a small business loan. They’re done mostly online and requires minimal paperwork - just what's needed to verify you meet the credit card transaction requirements. Instead of needing hours of your time preparing the business loan documentation, the statements needed by an MCA lender are quite easy to put together.
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PRO 4. Receive cash fast
The process is faster and done mostly online, the business owners get the cash much faster. In some cases, a business owner can have cash in their bank account in 24 to 48 hours.
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PRO 5. Get a smaller business loan
than banks may require Banks don't generally write business loans for small amounts. Banks are incentivized to prefer larger loans. Most small business owners are looking for anywhere between $5,000 and $25,000. An MCA deal works for both business owners and lenders in these lower amounts, so there's no need to take on more debt than necessary.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
PRO 6. Amount owed never grows
because there’s no interest
A Merchant Cash Advance isn't a loan. The business owner pays the factor rate, but it's not interest. The total amount you would owe on an MCA doesn't change. Restaurant owner Richie owes $65,000. If he has a slow period during which his repayments are lower than usual, that doesn't increase the overall cost of his MCA.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
PRO 7. No late fees – repayments
are made automatically
The lender gets paid directly from the business owner's credit card sales via the credit card processor. The business owner never has to worry about making a payment on time, so payment is never late. That means no late fees. It's very common for the MCA lender to get their retrieval rate on a daily basis.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
PRO 8. No collateral required
If restaurant owner Richie sees lower credit card sales than expected, it will take longer for him to pay off the MCA. He doesn't have to worry about the MCA lender taking his new kitchen equipment. Nor does he have to worry about having any personal liability to repay the MCA. Taking on the financial obligation of an MCA inspires less stress than business loans that require personal guarantees and collateral to secure them.
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PRO/CON Repayment amounts are fixed
percentage of sales
If sales are high, you'll repay the MCA quickly. If sales dip, you're not on the hook for a fixed, high repayment that doesn't care if your revenues and cash flow are low. You'll never get slammed by high debt payment in a slow month. That's a serious "pro.” The MCA lender has first priority on your credit card revenue, which means in a down month it may be more challenging for you to meet your other financial obligations.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
PRO/CON No fixed repayment term
If sales go down this may extend the repayment period. That's a con. Of course, it may not if your business experiences an upswing within the expected repayment term that balances out the low period. Taking longer than expected to repay an MCA won't increase the overall total of what you owe, such as having to negotiate a business loan extension would entail. You can mitigate both these pro/cons by negotiating a lower retrieval rate, as opposed to factor rate.
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CON 1. Merchant Cash Advance
money is more expensive than a business loan
Richie is paying $15,000 to borrow $50,000 on his MCA deal. If he qualifies for a business loan and a bank would write him a loan for $50,000 he would probably pay much less than $15,000 to get that money. The higher cost on an MCA deal covers the higher risk the lender takes on. This is the trade-off for many of the advantages of an MCA deal, particularly the more flexible qualification criteria.
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CON 2. Is it solving your
business need?
In our original example, restaurant owner Richie needs the money to invest in kitchen equipment, which is presumably something that will ultimately increase his revenue. This is good. If the cash flow crunch is not part of a normal business cycle, then it's prudent to take a closer look. Is the MCA cash going towards buying more inventory, which can be turned into revenue? Or is to going to pay rent or other overdue bills?
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
CON 3. Merchant Cash Advances
aren’t regulated
An MCA isn't a loan. A factor rate isn't interest. As such, it's not regulated by lending laws, including usury laws. An MCA is a financial contract. The application process may be fast, but that's what's happening after you decide where you want to apply for an MCA. Before that, you need to do the due diligence and learn about the differences in terms offered, and reputation of the lender.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
CON 4. MCA may have limitations put
on how you operate your business
For example, you couldn't offer a discount for cash payments that's not also available to those paying by credit card. So Restaurant owner Richie can't offer free desserts if diners pay in cash. Make sure to review any potential MCA deal carefully to see what it includes. Then you can make a determination if those are operational controls you can give up for the repayment period.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses
So does an MCA make sense for restaurant owner Richie? In his case, it looks like the pros definitely outweigh the cons. Never forget that an MCA is a financial obligation. So if you're thinking about it, review this list to see where the pros and cons fall for your business.
. View the full article: https://www.unitedcapitalsource.com/blog/10-pros-and-6-cons-of-merchant-cash-advances-for-small-businesses