What is a merchant cash advance?
A merchant cash advance (MCA) was originally designed as an up-front payment to a business in exchange for an agreed-upon percentage of future sales and revenue. The product is 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” originally referred to only credit card sales receivables as revenue, but now commonly refers to all revenue for a small business.
Merchant cash advances are not loans — rather, they are the purchase and sale of a portion of future revenue. 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 slower season. Advances are typically processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically weigh more heavily the underlying performance of a business rather than the owner’s personal credit scores, merchant cash advances offer a unique and flexible alternative to businesses who may not qualify for a traditional loan.
The primary appeal of an MCA for most business owners is the speed and ease of the funding process, and the 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 approval for most traditional small business loans depends largely on a combination of your personal financial history and future predictions of business performance, a merchant cash advance is based more on your pattern of revenue and/or financial transactions over the most recent three to six months.
Your credit score will be less of a factor, but it is still a factor. Most MCA providers want to see higher than a 550 FICO. In addition to this, they will also want to see a fairly consistent revenue stream from your business over the past three to six months.
Because your personal financial history is of less importance, merchant cash advances are an ideal option for small business owners that have faced rejection from other lenders, and/orthose with less-than-stellar credit scores.
One type of business that MCA’s are not a viable alternative for are startups. Since the underwriting for an MCA is primarily based on a small business’s revenue over the past three to six months, there is not much to go off of if you’re still in the startup phase of your business. If you are in need of startup capital for a new small business, we recommend explore the SBA.gov website in detail here.
Another potential benefit to the MCA approval process is that, in some cases, they do not require hard inquiries on your personal credit report. However, it should be noted that you must ask and confirm this point from the MCA provider, as this is not always the case. Also, many of the applications are very streamlined and simple to complete, and the reduced underwriting requirements means that you won’t need to supply as much documentation to potential providers. Plan on gathering three to six months of bank statements, as well as other basic documentation such as a driver’s license and voided check. Many MCA providers, such as SBF, have even eliminated the need for gathering PDF bank statements, by utilizing an online banking verification service such as Plaid, Finicity or Yodlee, to name a few. Should you request and be approved for a funding amount of $100K+, 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:
- Operating business and generating revenue for at least 3-6 months
- Using a business checking account
- Revenue in the range of $8-$15K per month minimum
- 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 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.
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