Designed to keep the cash flowing and help business grow, merchant cash advances are a great option if you need to raise capital for your small business quickly. Although a MCA, as they are generally referred to, can be a great solution in the short-term, it is important to understand exactly what you’re getting yourself into and some of the drawbacks that exist when pursuing this financial option.

1. How exactly does a merchant cash advance work?

The number one thing to understand if you’re considering a merchant cash advance is that it is not a loan. It is not something that you are expect to repay, but rather it is an advance payment against your business’s future income. The money is delivered to you as one set lump sum, and is automatically repaid according to a predetermined percentage of your daily credit card receipts.

Repayment will be begin as soon as the funds are received, but the terms under which this repayment takes place will depend on several factors, including the size of the loan and the agreed upon period over which the payment will take place.

2. How much will I be able to receive?

The biggest determining factor of how much money you will be eligible for is your average credit card sales. Prior to deciding how much money they are willing to offer you, merchant advance providers will spend some time reviewing your receipts, usually over the last six month or so, to calculate an average and assess your typical profits. As a general rule of thumb, you can expect to receive something between 50% to 200% of your business’s credit card transactions.

3. How can I benefit from a merchant cash advance?

There are several key benefits that make merchant cash advances a good option in many situations. One of the nicest things about this process is how easy it is to apply. You can do it entirely online by completing the application and uploading any required supporting documents, such as business tax returns and bank account statements.

Due to how swiftly this process can be completed, you can also have the funding in your pocket quite quickly. In fact, advance providers can reach a decision within hours and get you the money in a matter of days. This can be a huge lifesaver if unexpected expenses arise or you need to cover payroll.

4. Am I even eligible?

If an imperfect credit score often keeps you from seeking business loans, a merchant cash advance might be the solution. In this case, your eligibility is more dependent on the consistency of your credit card sales and how long you have been in business.

That being said, if improving your credit score is a priority when it comes to your business, a merchant cash advance won’t do much to help. As a result of the fact that most providers don’t report advances to the credit bureaus, getting a MCA will neither help not hinder your current score.

5. What are the risks involved?

As with all financial transactions, there are some risks involved with merchant cash advances and you need to think carefully about whether or not it is the best solution for your situation. Understanding factor rate is important in assessing the actual cost of a MCA. Unfortunately, factor rate is largely misunderstood, and can make the interest rate appear lower than it actually is.

Take the time to run the numbers, and be aware that often a MCA can be one of the most expensive borrowing options. Try to negotiate a lower holdback percentage in order to minimize the costs, but don’t agree to anything until all the numbers are crystal clear.

  • Gretchen is a spiritual guide and life coach. She uses the MANDALA HEALS blog to dispense advice, tutorials & guides on various topics.

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