Overall, MCA can be used to describe short-term business loans and future credit card sales receivables. This type of financing is available to businesses that deal with credit cards on a regular and consistent basis, such as restaurants, retail stores, pharmacies, and so on.
What Is a Merchant Cash Advance?
Obtaining a merchant cash advance is typically a quick process. The first step is to verify the identity of the company seeking the loan. The following documentation is required:
Identity documentation issued by the government
Processing of bank and credit card statements
Returns on business taxes
Once the identification approval is completed, it will only be a matter of days before the business receives its loan amount. They then receive a lump sum payment and repay it to customers through sales generation.
To repay the loan, the borrower offers a percentage of sales to the lender on a daily basis, as specified in the contract. It can also be done through the connected merchant account, which is calculated based on debit and credit card sales. Cheque and cash sales do not count toward the daily quota in this case.
Compensation payments can also be made directly from the borrower's bank account via Automated Clearing House (ACH). Small-scale businesses with low credit and debit sale rates can also qualify for MCA if they choose ACH repayments, according to this logic.
Borrowable MCA amounts range from a few thousand dollars to over 200,000 dollars. Regardless of the rented amount, the payback time is usually very short. In most cases, it is around 18 months.
Advantages of MCA:
MCA has several advantages, some of which are as follows:
A Simple Application Process: MCA has a simple application process, and money can be borrowed in a day. It is also simple to qualify because loan credit history is less important than sales history in this case.
MCA allows for a variety of payment plans and methods, as well as the ability for borrowers to use the funds as they see fit. Because payments are based on a percentage of daily transactions, debtors are not required to repay if they have a low income. It causes cash flow problems, which can lead to further debt.
Absence of collateral: MCA loans are unsecured, which means they do not bind borrowers to any collateral. This feature is a godsend for businesses with limited assets.
MCA has the following disadvantages:
Potential Cash Flow Issues: MCA requires a portion of the borrower's future sales to be dedicated to repaying the borrowed amount. This generates cash flow, which can lead to the company incurring more debt.
Comparatively Cost Increases: The cost of obtaining an MCA, expressed as factor rates rather than interest rates, is significantly higher than the cost of many other types of funding. Because factor rates do not depend on a specific period, paying off in advance does not save money."""