Small business financing is usually built around the purpose of the funds. That’s why asset acquisition loans offer you options with fairly long terms and amortizing payments. It gives you low monthly overhead and allows you to reach a return faster by avoiding a full out-of-pocket payment upfront. It’s also why financing that aims to provide working capital tends to be built around the business cycle of your actual company. For those who do a lot of credit card sales and other electronic transactions, a merchant cash advance is a popular option.
What Is an MCA?
An advance against your merchant account is pretty much exactly what it sounds like. You get cash to work within the short term, the lender gets a percentage of the account’s income until repayment terms are met. Usually, there is also an interest cost.
These advances are designed for short-term capital infusions so the interest rates are high when figured as annual costs. For a couple of months, though, the financing typically works out to be quite affordable.
Risks and Benefits of Merchant Account Advances
One of the biggest benefits of using a merchant cash advance over a traditional bank loan is the speed of approvals. MCAs are designed for fast approval based on your income and your company’s financial health. Some programs even manage to run approvals in as little as 48 hours. For regular customers, it can become even faster.
MCAs are useful when you need capital to hire short-term help or load up on inventory because they are based on your income averaged over a few months, so healthy companies can get a significant sum when it’s needed to make the most of a profit opportunity. They do have risks, though.
These advances are short-term working capital instruments, they are not secured beyond their attachment to a business asset, and as such, they do have a relatively high cost of capital annually. If you are unsure of your ability to make repayment quickly when business picks up or a predictable demand surge comes your way, there may be better cash flow management options for you. If you know your company’s demand cycle and the time your applications correctly, though, the merchant cash advance is a powerful tool.
Applying for an MCA
Since the MCA is based on your merchant account income, you will need to show bank statements substantiating that income. Credit checks are also usually a part of the process, but they do not tend to be the make-or-break criteria even if the lender does check personal and business scores. It’s more a way of assessing your ability to meet the overhead costs you have while repaying the MCA according to its structure. Once that is substantiated, determinations are quite fast.