What is a merchant cash advance?
A merchant cash advance (MCA) was originally designed as a up-front payment to a business in exchange for an agreed-upon percentage of future sales and revenue. The term is now used to describe a wide array of small business financing options characterized by short payment terms (generally under 24 months) and small regular payments as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. The term “merchant cash advance” may be used to describe purchases of future credit card sales receivables or short-term business loans.
Merchant cash advances are not loans — rather, they are a sale of a portion of future revenue. Because of this MCA’s can be processed without the same amount of underwriting than a traditional term loan. This structure may have some advantages over the structure of a conventional loan. Payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner’s personal credit scores, merchant cash advances offer an unique and flexible alternative to businesses who may not qualify for a traditional loan.
The appeal of an MCA is the speed and amount of cash available in a matter of days. In some cases, up to $500K in 48 hours is not out of the realm of reason….assuming the business can qualify.
How to qualify for a merchant cash advance
While the approval for most small business loans depend largely on your financial history, a merchant cash advance is based more on your pattern of revenue and/or financial transactions. In most cases, payments are taken straight from your merchant account so if you’re bringing in enough money each month, for a long enough period of time, your application will typically be approved.
Your credit score will be less of a factor but it is still a factor. Most MCA fundings want to see higher than 550. In addition to this, they will also want to see a consistent revenue stream for 3-6 months.
Because your past is of lesser importance, merchant cash advances are an ideal option for small businesses that have faced rejection from other lenders, such as those with less-than-stellar credit scores.
The big issue is startups. Because advances are based on incoming revenue, they are no a viable tool for new startup businesses. Again, almost all underwriters of MCA’s will want to see 3-6 months of consistent revenue. If you’re in need of startup capital for a new small business, we recommend explore the SBA.gov website in detail here.
One nice benefit to the MCA approval process is no hard inquiries on your credit. The applications are very streamlined and simple to complete. with the most onerous part being providing business income verification. The typical application for a merchant cash advance means that you won’t need to supply as much documentation to potential lenders. Plan on gathering 4–6 months of bank statements, as well as other basic financial documentation. Depending on the lender, you may also need to submit your tax returns, AR (accounts receivable) summary, and profit and loss statements. This short list of documents contrasts sharply with loans from the Small Business Administration (SBA), where the infamously tedious application process requires you to provide all manner of paperwork and justification
To recap, if you’re considering a merchant cash advance as a funding solution for your small business, the keys to approval are as follows:
- In business and generating revenue for at least 3-6 months
- Use of a business checking account
- Revenue in the range of $8-$15K per month
- Credit score better than 550
- Not currently in another MCA
- Not currently in default on other loans
- Viable use of funds
About Small Business Funding
We are the one stop alternative financing funding source. Regardless if you have bad credit, short time in business, tax liens, judgments, or fast capital needs, we are your solution.
Our philosophy is why work harder when you can work smarter? That’s why Small Business Funding, through our network of financial partners, work with multiple providers on your behalf. Getting you the best rate and terms for your business.
Our network offers you access to quick and easy working capital to meet your individual business needs. We will put together a program to suit your business goals and financial situation, with ease. Why fill out 2, 4, even 6 applications when all you need to do is fill out one?
We recognize that small businesses are the driving force to grow our economy. In good times, as well as the challenging times, business owners need a fast cash flow solution. Whether you use it for payroll, purchase new equipment, expand inventory, pay taxes, etc. Fact is, it doesn’t matter what you use the funds for, as long as it helps grow your business and increase your revenue!
If your company was turned down by traditional lending sources, such as banks and other commercial lending institutions, Small Business Funding can help.
Join our family – we look forward to serving you. Apply today