New small businesses are always in need of some way to support themselves in the short term so that the owners can work towards achieving their long-term goals. This is where an MCA, or merchant cash advance, comes in. This type of funding allows the business to access quick cash without having to go through the application and approval process of a traditional bank loan. In this blog, we’ll take a closer look at the MCA and how it can help you.
An MCA comes from an alternative lender. It is different than a traditional bank loan. An MCA lender will look at your credit card receipts and figure out how much you need and how much you’d be able to pay them back. The contract will outline what you’re getting and how much interest you’ll be required to pay back.
Interest rates will vary from one company to another. Plus, since some states have a cap on interest rates, where you are located will also affect what you will pay.
How Does it Work?
While it’s true that the application process for an MCA is not as extensive as a traditional bank loan. It’s not just a free stack of money. There is a contract between the business owner and the lender with stipulations attached. As a business owner, you need to be aware of these things when getting an MCA for your business.
In the contract, the advance amount is what the lender is giving you. Make sure that you ask for only what you need, or you’ll end up having to pay more back. The amount can be more than, less than, or equal to your monthly sales. It just depends on what you need and what you’re comfortable having to pay back.
This is going to be higher than your advance amount because the lender will add on their fee. In some cases, this amount can be higher than the interest rate on other types of funding.
When you are working to pay back your MCA, there will be a daily amount you are required to hold back from your credit card transactions. Therefore, analyze your sales and see if this is viable for you.
Advantages vs. Disadvantages of MCA
Unfortunately, needing access to cash quickly is an issue for many small businesses- but before you sign up for an MCA, it’s a good idea to look over the advantages and disadvantages.
The advantage of an MCA is that you quickly get the cash you need for your business. If you have something that needs to be taken care of, an MCA can be a way to get the cash to do it.
Unlike a loan, you won’t need collateral to back it. Plus, though the lender will pull your credit score, they are typically more flexible if you have mediocre or bad credit.
Plus, an MCA lender will give more flexible payment options. If sales are slow, you can adjust your daily holdback.
Since there is a factor added to the MCA, if you are in a period of slow sales, the payback amount could be detrimental, taking away your necessary profits. Also, since MCAs are not regulated, the factor is usually higher than the interest on a traditional loan, which can cause problems in the future if you owe more than you can afford.
Finally, most of the time, the term on an MCA is shorter than a traditional loan.
Who is an MCA Best For?
An MCA is an ideal option for a small business that needs some extra funds but doesn’t qualify for a traditional bank loan. On the other hand, if a business has experienced a major disaster and completely shut down, an MCA is not a good option. If you want to learn more about how an MCA can benefit your small business, contact Critical Capital Solutions. We can also help you find other options if an MCA is not a good fit for you.