A merchant cash advance (MCA) is a type of funding for businesses that may not qualify for traditional financing. It provides quick access to capital with a flat payback, often with an early payment discount. Payments are made either weekly or daily, making it an attractive option for businesses looking for immediate working capital.
Pros
One of the primary advantages of an MCA is the quick access to capital. The application process is often easier and faster than traditional financing options. Many MCAs are approved within 48 hours — a stark contrast to the weeks or even months it can take to go through traditional loan applications.
Funds can often be used for any purpose, including working capital, marketing, inventory, payroll, and more. This makes MCA an attractive option for businesses who need to quickly access capital for a variety of reasons.
In addition, there is no need for collateral. Approvals are based on the business’s ability to repay (revenue) and not on what assets it may have or credit. This makes it an attractive option for businesses that do not have sufficient collateral for a traditional loan.
With a micropayment structure payments are more frequent but easier to make resulting in less of a chance of a default or late payment. Generally speaking no more than 5% of your account balance will be taken, leaving you to with a minimum of 95% of your working capital.
Finally, payments are made daily or weekly, making budgeting easier. Businesses are able to pay off the advance quickly and reduce their overall debt load.
Cons
While there are advantages to an MCA, there are also some drawbacks.
One of the primary drawbacks is the cost. MCAs can be expensive, with rates ranging from 10-50%. This cost is often justifiable for businesses who need access to capital quickly and who may not qualify for traditional loans, or when the return on investment is greater than the rate. Either way it is important to understand the terms and conditions of the loan before proceeding.
In addition, repayment schedules are often tied to business sales and taken weekly or daily. As sales and revenue fluctuate, businesses may struggle to make timely payments, leading to late payment fees. This can create a cycle of debt, where businesses may struggle to make payments and find themselves deeper in debt.
Finally, MCAs are not suitable for every business. It is important to weigh the risks and rewards of taking out this type of loan before proceeding.
Overall, a merchant cash advance can be a great option for businesses that need quick access to capital or who may not qualify for traditional financing. However, it is important to understand the terms and conditions, including the general practices of these types of loans. If you think a merchant cash advance will be a good solution for your business, Trust Capital is a direct lender with flexible payments structure and low rates, get started with our online application and have offers within 25 hours!