A merchant cash advance (MCA) is a form of financing that allows a company to sell a portion of its future sales in exchange for immediate payment. If you run a seasonal business or have a high volume of credit card transactions, then a merchant cash advance might be right for you.
Merchant cash advances are most often used by retail businesses that do not qualify for regular bank loans and are generally more expensive than bank loans.
An MCA is an option when a business needs access to capital quickly to take advantage of an opportunity to purchase inventory at a discount, a special marketing opportunity, or other short-term capital need. When you need to raise capital for your small business quickly, a merchant cash advance or MCA can be a shortcut to funding.
How does MCA work?
A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future sales or you can get upfront cash that is repaid by remitting fixed daily or weekly debits from your bank account, known as ACH, for Automated Clearing House, withdrawals.
Merchant cash advance providers “purchase” your future credit card receivables at a discount and charge you a factor rate in place of an interest rate. Factor rates generally range from 1.1 to 1.5 times of the amount advanced. The most important costs associated with a merchant cash advance are the factor rate and the holdback percentage. The factor rate is the total amount of capital you’ll have to repay your provider, and the holdback percentage is the percentage of daily credit card sales the provider collects until the factor rate is repaid in full.
The percentage you pay is referred to as the “holdback” or retrieval rate. This may be anywhere from 5% to 20%, based on the size of the advance, your business’s credit card sales, and the repayment period. Depending on the advance amount, terms may be as short as 90 days or as long as 18 months. Repayment begins immediately after the funds are received.
The application is often simple, meaning that it often has a faster turnaround time than other types of business financing. The application process can usually be completed and approved within a few days and often less than a week.
Benefits of Merchant Cash Advance
Merchant cash advances provide many benefits, from a simplified application process and quick capital to credit protection. Merchants utilizing this as their best financing option reap plenty of benefits.
1. Quick and efficient
The application process can usually be completed and approved within one day. There’s a very high approval rate, and funding is usually available within a day or two.
2. No collateral needed
The merchant cash advance will be a relatively safe way to receive cash. Commercial loans can affect credit ratings, but the MCA will depend on future sales.
3. No credit check
The merchant cash advance will be a relatively safe way to receive cash. Commercial loans can affect credit ratings, but the MCA will depend on future sales. That is why it is not present on any credit report.
4. Repayments are based on sales
Repayment happens only when the company makes money. What you remit depends on your credit card sales. This percentage-based collection policy allows a business to grow instead of draining its funds.
This quick and easy funding solution is best suited for businesses whose income mainly comes from credit and debit card sales. If you own a restaurant or a retail store, for example, you can use a merchant cash advance as a short-term financing option. When you use a merchant cash advance, your payments are proportionate to your profits.
In order to make the best possible decision for your business, you first need to understand exactly what a merchant cash advance entails so you can determine whether or not it really fills a major financial need for your company.
When searching for a merchant company to work with, be sure you’re working with the best. So thoroughly vet your options before you sign on the dotted line with any of them.
Merchant Cash Advance Syndication
Merchant Cash Advance Deal Syndication is when a funder gets investors or funding companies to co-fund a merchant cash advance deal. A syndicated merchant cash advance deal can be funded partially or entirely by investors. Syndication provides investors with the opportunity to invest in small businesses while limiting their exposure to risk.
The word ‘syndicate’ means a group of people or organizations combined to promote a common interest. Syndication provides investors with investment opportunities and business owners with the capital they need to expand their enterprises.
Syndication- In real estate, the purchasing and operating of property by sourcing the funds from others in one of the various ways. The sponsor would get a loan on the property, and when the investor buys a share, they would also be buying that portion of the debt too. In some syndication structures, sponsors will offer preferred returns such that passive partners receive a fixed rate of return on their investment.
Since the market is continuously changing, there’s more to merchant cash advances these days than simply making commissions. Wealthy individuals and investors spend their days cold calling merchant cash advance companies, brokers, and even me, trying to get their money into these deals.
The solution to the high-risk nature of merchant cash advances is syndication. The MCA industry is maturing, that is, stronger organizations, including large, branded public companies, are now participating, bringing both capital and greater financial discipline, Investing in more contemporary technology architecture offers the opportunity for banks to interoperate with other core systems more seamlessly, reduce processing time and take on larger, more complex loan arrangements.