It’s not uncommon for small business owners to occasionally experience temporary cash flow issues. Unexpected expenses, a seasonal increase in business or delays in payments can interfere with the working capital that you need to run your business. You may find yourself in a position where you need an influx of cash. In going the traditional route, you might choose to meet your need for capital by applying for a long or short-term business loan. Or you could take an alternative route and request a merchant cash advance from your credit card processor.
What Is a Merchant Cash Advance?
Just like a business loan, a merchant cash advance (MCA) is a working capital financing option. The funds obtained through this alternative financing option can help you:
- Meet your payroll obligations
- Repair or purchase new equipment
- Deal with seasonal demands
- Expand operations
But unlike a traditional business loan, an MCA is an advance on your earnings from your future credit card sales. The provider of the MCA purchases your future credit card receivables at a discount. Instead of being charged an interest rate as with a business loan, the provider charges you a factor rate that usually will range between 1.1 to 1.5 times the amount of funds advanced. The maximum allowable amount for an MCA is 50 percent of your company’s annual credit card sales. So, if you earn $500,000 a year from credit card sales, the most your company could borrow would be $250,000.
The provider of the MCA would advance a lump sum payment to you once you are approved within one to three days. This is a timeframe that is similar to the releasing of funds with a business loan. Instead of making a monthly loan payment, you would repay your MCA with an agreed upon holdback percentage on your daily credit card receipts. While the holdback percentage is a fixed amount, the amount of money you repay each day would vary and would result in a variable repayment term. The repayment term is typically between four months to 18 months. During that time, the APR could widely vary.
When Is a Merchant Cash Advance a Better Option?
While the cost of a merchant cash advance can be higher than a traditional business loan, they do serve a purpose and could provide a lifeline to some business owners. For example, to qualify for a business loan, you may be required to be in business for at least a year, have revenue of more than $100,000 a year, and submit to a review of your credit report.
If you’re in the process of rebuilding your credit or plan to obtain a loan in the future and don’t need a loan showing on your credit report, an MCA may be a better option for you. The same is true if you run a seasonal business, are an online merchant with an established account with a credit card processor or have been in business between six to 12 months.