If you have a small business that needs money fast, then a merchant cash advance might be for you. This is an alternative to an unsecured business loan or other such options, and it has advantages, as well as drawbacks. Should you get a business loan or a merchant cash advance? You’ll have to decide that after you read everything there is to know about both options.
What Is A Merchant Cash Advance?
- A merchant cash advance is, like the name says, an advance you receive, in cash, from the money you are set to make later from your business. It’s important to clarify that this is not a loan, but merely an advance. This enables you to regularly receive money in your business merchant account. This type of advance is typically used by small businesses, and the rates are higher than loan alternatives for small business loans.
What Is The Process For A Merchant Cash Advance?
When applying for an advance like this, you agree to terms with the merchant cash advance (MCA) provider. That includes the amount you take, the holdback percentage, and the amount you pay back. The money is then immediately received in the business' account. Then, the previously agreed upon holdback percentage of credit card receipts or daily revenue is held back every day until the full sum is paid off.
It takes a few days to get accepted for a merchant cash advance; the exact time depends entirely on the provider. After approval, the money will typically be in the account in about two days. What is the application process like? There are a few steps a business owner needs to follow:
Application: It’s easy to apply for a MCA – you just need to fill in an application that requires details about your business, such as your business tax ID, your National Insurance Number, and other additional info.
Paperwork: As for the paperwork you will be required to present, you'll need bank statements, as well as payments processing data or credit card data dating back a few months.
Approval: Approval can take a few days, depending on the provider you choose, but it can be done in just one day.
Processing: Keep in mind that at this stage, the business might be required to make some changes in credit card processors. It’s not obligatory, but it is possible, and while it is not the most convenient part of the application, it can be necessary in order to be approved.
Finalisation: This step is finalising the details like the advance amount, the repayment amount, the holdback percentage, etc. It's important at this stage to pay attention to every single date and number, in order to not be surprised later.
Deposit: When the process is done, the money gets deposited into the account and repayment can begin starting with the very next day, in the percentage agreed upon.
Is A Merchant Cash Advance Suitable For Your Business?
Not every business will be a good candidate for a MCA. There are a few conditions your business should meet in order to have a good chance to be approved. Your business should be in need of urgent capital, but must have a good cash flow in order to be able to pay the pre-agreed upon percentage.
In addition, the reason for the advance should be important enough to be able to support the advance, because it can get expensive. Furthermore, if your business has a poor credit profile, but has a lot of credit card transactions monthly, this might be a good option, since credit requirements are not as high as those on other small business loans.
Remember a merchant cash advance is not a loan to start a business, but one to help your already existing business. To learn more about setting up a business, check the Gov.uk page dedicated to the process.
Why Get A Merchant Cash Advance?
Now that you’ve got all the necessary information, you might ask yourself why you should get a merchant cash advance. What are the advantages of such an option, considering that the rate is so much higher?
It doesn’t require collateral
Other small business loans require you to put an asset up as collateral in order to give you the necessary funds, but that is not the case with MCAs. The good thing about this type of lending is that there is no need for collateral, because the MCA provider has daily access to the accounts of the business. The repayments are made automatically and do not rely on the business owner, so the MCA provider has more security than a provider of unsecured loans, for example.
The repayment is percentage based
In addition, one of the biggest advantages is the fact that repayment for this amount is based on percentage. So, this means that in leaner times, the business will have a smaller amount to pay off, instead of getting stuck with a massive fixed amount they cannot afford to pay.
On the flipside, when business goes well, the percentage paid equals a higher amount, so the total gets paid off faster. This is a win-win situation for both parties: the business pays less when they can afford more and pays more when they can afford more, and the lender receives the payment, regardless of how well the business is going. Slower repayment is better than no repayment.
The application is faster than on a small business loan
The other thing that attracts a lot of business owners to MCAs is the fact that the application process is faster, which means that you get the funds in your accounts earlier. Your business can be approved in just a day, and the process can take a maximum of a few days, including the time it takes to receive the money.
In conclusion, a merchant cash advance can be an excellent option for your small business, if you need fast money and can justify the expense. If you’re still not convinced, you might want to read about the 5 reasons to go for a merchant cash advance loan and decide if this is an option for you.