A merchant cash advance (MCA) is an advance that allow small businesses to withdraw funds from the merchant account. The amount of advance that you can withdraw will depend on the future sales of your small business. The creditor will take a look at the payments that you received through credit cards or receivables to determine if you have the ability to repay back. Merchant cash advance should be used as the last resort for an urgent funding if you have no other alternatives. The downside of merchant cash advance is the high interest rates and other expensive fees. Typically, you will pay 120%-140% of the principal amount that you originally borrow. You must not confused the hold back rate with the repayment rate. The hold back rate is the amount of revenue that is held back daily whereas the repayment rate is the percentage that you have to pay back. For example, if your business advanced $15,000 with the hold back rate being 20% and the repayment rate being 30%. This means that $3,000 of your daily revenue will be hold back until you pay back the $4,500.
The agreed portion of daily revenue will continue to be held back until the advance that you borrow has been fully repaid. It does not require provision of a collateral because you already give the lender access to your merchant account. The time it takes to fully repay the advance depends on how much sales you make. The more sales you make, the faster you can pay down the advance. The amount of repayment that is deducted will be lesser if you make lesser sales on that day. Many small businesses have fall into the debt trap because they are unable to keep up on the daily repayment schedule.
Most of the small businesses that resort to merchant cash advance couldn’t get approved for the regular personal loan or small business loan. You can easily get approved for MCA loan as long as you regularly receive a lot of credit card payments. If you want to apply for this type of loan, make sure you read the fine print and fully understand the terms including the interest rates, fees and repayment schedule. This will help you to decide whether applying for the merchant cash advance loan will improve the ROI of your business.
To apply for the merchant cash advance, you must provide several documentation including SSN, tax ID, statement of the credit card processing for the past few months and etc. It can take as fast as 1 day for the lender to approve the loan. Many MCA providers require the small business to change a different credit card processor. The funds will be deposited into the bank account of your small business.