If “immediate funding” tops your priority list and poor credit is an obstacle, then a merchant cash advance is your safe landing.
MCA funding presents instant cash to a business owner in need of money. Settlement happens through per day or week credit card sales. The lender deducts an agreed-upon percentage per credit card payment, so borrowers mustn’t struggle with per-month settlements.
So how does this product work? Is it the right choice for your company?
How it Works
Generally, the lender offers an advance amount to your business in trade for oncoming credit card sales. As the borrower, you agree to surrender a percentage of your oncoming sales as repayment for the instant lump sum.
The settlement model is structured in two different ways:
- The Percentage plan: A lender remits a percentage of all credit card payments until you settle the MCA. Most MCA settlement periods last from 3 to 12 months. For this approach, settlement heavily relies on your credit card earnings.
- Per day/week plan: A lender sets a per day or week schedule to remit Lenders will establish a daily or weekly schedule to deduct the MCA amount. For this approach, you pay the agreed-upon percentage daily or weekly regardless of credit card income.
These products are structured differently, depending on the lender. The percentage plan is an excellent option because repayment varies with credit card income. Still, the per day/week suffices if your business rakes in a steady income and would like to repay in fixed installments.
Merchant cash charges a factor rate in place of interest rates. This factor rate usually falls between 1.2 to 1.5 but some factors may push the rates higher, such as;
- Poor credit rating
- Your company income fluctuates
- Your credit card income is hit-or-miss
A higher factor rate means more trouble as it impacts the payable fees, but lenders consider it the cost of doing business with a less-qualified borrower.
MCAs are advantageous in many ways;
- First, you get instant funding. Most applications happen online, just in seconds, and acceptance can be as immediate as 24 hours.
- It’s also excellent for a company struggling to recover from a drop in income. Repayment depends on how much credit card sales you make, meaning you pay less during low sales and higher as sales increase.
- Lastly, there are no collateral requirements because you offer a percentage of your oncoming income.
But while boasting many pros, MCAs are not without their cons. Apart from having to settle a huge loan in a very short time, borrowers have complained of exorbitant MCA providers.
You want to take out a loan with a reputable lender and compare plans to get the right MCA product.
Author Bio: Michael Hollis is a Detroit native who has helped hundreds of business owners with their merchant cash advance solutions. He’s experimented with various occupations: computer programming, dog-training, accounting… But his favorite is the one he’s now doing — providing business funding for hard-working business owners across the country.