A business cash advance is another name for Merchant Cash Advance or MCA. Merchant Cash Advance has gained a lot of prominence in the past few years. This financial product was initiated to make the future sales of the credit card. Nonetheless, this financing option has developed into a solution that authorizes small undertakings to fund any kind of their future sales. MCA is the best funding option for small companies.
1) What do you mean by business cash advance?
A business cash advance or an MCA is the kind of loan that is provided to small companies as well as startups in exchange for future sales of the credit card. An MCA is a quick source of short-term financing.
Restitution of these funds is done by the business merchants on a monthly basis. The procedure of repayment starts immediately after the loan has been provided to the merchant. The MCA provider either debits your bank account on an everyday basis or takes a certain percentage of your current sales.
This structure of finance is very similar to short-term finance structure rather than a line of credit. People call this financial product a business loan but in reality, it is not a loan. Rather, the providers of Merchant Cash Advance state it as the future sale of an asset.
2) Sales of credit card
A business cash advance can be utilized to fund almost every kind of future sales. A transaction of the credit card is a very common kind of sales as paying back can be done easily from the perspective of the lender. Although the companies can fund their future sales of cash, the repayment procedure of such kind of transactions is very distinct.
3) How to calculate the amount of funding?
The provider of business cash advance decides the amount that he or she is going to provide the small enterprises by taking their sales record into account. He or she also reviews the previous transactions of the credit card.
Additionally, the MCA provider analyzes the statements of the bank. Most of the companies offering a cash advance finance at least 100% to 150% of the average sales in a month. The amount of cash advance also depends on the financial stability of the organization.
4) Calculation of the repayment amount
The amount that is going to be repaid is a little higher than the amount, which was provided. The providers of cash advance consider it as a factor that ranges somewhere between 1.09-1.50. The payback money is determined by multiplying the amount of cash advance with the factor.
For instance, if a small company takes a business cash advance of 50,000 dollars with a factor of 1.09, then it will be required to repay 54,500 dollars. In this case, a small firm has to pay back 4,500 dollars more than the amount of the MCA they receive.
Mostly, the transactions of Merchant Cash Advance are short-term, that is, between 3 to 15 months. In order to do the calculation of the transaction APR, you are required to consider the term of repayment as well as the factor of cash advance.
5) How to repay business cash advance?
Paying back of cash advance is very similar to a term loan. You receive the upfront finance and then make repayments until the outstanding amount is fully paid. Cash advance is repaid by sharing a fixed proportion of the future sales of the credit card.
The revenue rate that is paid to the companies offering cash advance is known as retrieval rate. These rates of retrieval range between 8% and 13 % of your company’s sales. It is taken care of by making use of the split processing with your company of credit card processing.
Cash advance is paid back by debiting the bank account of the merchant on a daily basis. The institutions of cash advance deduct a certain amount from your business’ bank account on a daily basis until the amount is completely paid off.
6) Benefits of taking a Merchant Cash Advance
There are a lot of benefits that a businessperson can get by taking a business cash advance. The biggest advantage is that it can be obtained very quickly and easily. Additionally, it has a very convenient eligibility criterion as compared to a business loan. Moreover, it can resolve all your short-term financial issues. It is the best source of financial assistance for small companies having emergency financial requirements.
Moreover, Merchant Cash Advance can be used by a small company to expand its business. The most amazing benefit that a small firm can get by acquiring a Merchant Cash Advance is that they do not have to worry about the bad credit problems. The providers of MCA are ready to offer funds to small enterprises having poor credit.
7) Other sources of business financing
a) Microloans of SBA
Microloans of small business administration are an alternate of business cash advance. The small business administration provides micro loans with a maximum value of 50,000 dollars. These loans are easier to acquire as compared to the traditional bank loans. Microloans are offered along with management and consulting workshop, which is a great option for merchants of small business. But the problem with these commercial loans is that they are offered to customers who are engaged in a business with commercial customers.
b) Invoice factoring
Invoice factoring is another alternate of business cash advance. It is the type of funding, which can be utilized by the firms in selling the services and products to other organizations. Commercial transactions are usually performed in a time period of 30 to 60 days that can lead to issues in the cash flow of your company. Small companies can pay daily expenses of their business by using invoice factoring. These programs are tied to the sales of small companies and grow with an increase in the number of sales.
8) Concept of business cash advance
A cash advance is available in different varieties. The most famous type of cash advance is merchant cash advance. It does not have a fixed term of repayment and hence it is not called a loan. An unsecured loan of business is based on the volume of the credit card. Business cash advance is not a loan instead it sells the future sales of the credit card. MCA companies offer financial assistance to the companies in exchange for the daily income of the credit card.
9) Eligibility criteria for business cash advance
The basic requirement for a small business to become eligible for a Merchant Cash Advance is that it should deal with the transactions of the credit card. Another criterion that the small companies are required to fulfill is that it should be in operation for the past 6 months. These are some of the obstacles that small companies have to face.
In order to accept cash advance from the companies of Merchant Cash Advance, the owners of the business are required to change their system of sales and the processing of the credit card as many of the companies offering cash advance have their personal proprietary software as well as hardware developed in their system.
10) Automated Clearing House
Today, Merchant Cash Advance is available for companies, which do not rely particularly on the debit and credit card sales. A provider of cash advance offers a sum of money in exchange for a segment of future sales. The repayment structure of an MCA is designed in two different ways.
You can get an upfront amount of cash in return for future sales of the debit as well as credit card transactions. This amount can be repaid by fixed weekly debit or credit from the bank account of small companies. This is called the withdrawal of Automated Clearing House.
Rather than making a single fixed payment on a monthly basis over a specified period of repayment, business cash advance enables a small firm to make weekly or daily payments until the cash advance is paid in full.
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So, these are some of the things about business cash advance that every small company needs to know. Business cash advance is a source of short-term financing for small companies. It offers various advantages to the small companies.
Merchant Cash Advance has a quick approval process. Providers of business cash advance are ready to give you a loan even if your organization has credibility issues. Moreover, the repayment of Merchant Cash Advance can be done by paying a fixed percentage of regular receipts of your business credit or debit card. Additionally, small enterprises can use this cash advance for meeting the day to day and working capital requirements of their business, along with its expansion.
Merchant Cash Advance is the most convenient option for small companies that are looking for financial support. In order to become eligible for a merchant cash advance, a small company has to be in operation for at least past 180 days. Moreover, it is necessary for a small company to receive payments through credit cards only. Overall, a business cash advance is a great source of finance for startups and small companies.