Merchant Cash Advances (MCAs) are an alternative financing option for small businesses. They provide quick access to capital, especially for businesses that may not qualify for traditional loans. It is crucial to note that an MCA is not a loan. Instead, it's a cash advance based on future sales, often credit card sales. Businesses receive a lump sum of cash upfront in exchange for a percentage of their future sales. This is particularly useful for businesses that need immediate funds for operations, expansion, or other needs but have a steady flow of sales.
In this blog, we will explain what MCAs are, how they work, the fees involved, and the repayment structures.
So, how does MCA Work?
1. Application and Approval
The business owner applies for an MCA with a provider. The application process is typically quick and straightforward. Providers look at the business's sales history, particularly credit card sales, to determine eligibility. Unlike traditional loans, MCAs do not require collateral or a high credit score.
2. Offer and Agreement
If approved, the provider offers a lump sum amount. This amount is based on the business's average monthly sales. The business owner then agrees to repay the advance by allowing the provider to take a percentage of future sales.
3. Repayment Structure
Repayment is usually done daily or weekly. The provider automatically deducts a fixed percentage of the business's daily credit card sales until the advance and the fees are fully repaid. This means that the repayment amount fluctuates with the business’s sales volume. If sales are high, the repayment happens faster; if sales are low, the repayment takes longer.
What are the Advantages of MCAs?
1. Quick Access to Cash
One of the biggest advantages of MCAs is the speed of access to funds. Businesses can often get the cash they need within a few days.
2. Flexible Repayment
The repayment structure is tied to sales. This means that businesses pay more when sales are high and less when sales are low, which can be a relief during slow periods.
3. No Collateral Required
Unlike traditional loans, MCAs do not require businesses to put up assets as collateral. This reduces the risk for business owners.
4. Simple Application Process
The application process is usually straightforward and less stringent compared to traditional loans, making it accessible for businesses with lower credit scores.
How much does MCA cost?
MCAs come with fees, often referred to as a factor rate. The factor rate typically ranges from 1.1 to 1.5. To understand how this works, let's say a business takes an advance of ₹10,00,000 with a factor rate of 1.3. The total repayment amount would be ₹13,00,000 (₹10,00,000 x 1.3). This ₹3,00,000 is the cost of the advance, which includes the provider's profit and any associated fees.
So, is an MCA Right for Your Business?
Deciding whether an MCA is right for your business depends on several factors:
1. Cash Flow Needs
If your business needs immediate cash and has steady sales, an MCA can be a quick solution.
2. Cost Consideration
Consider the total repayment amount and ensure that your business can handle the costs without jeopardizing operations.
3. Repayment Ability
Ensure that your sales volume is consistent enough to support the daily or weekly repayments.
Wrapping Up!
Merchant Cash Advances offer a viable financing option for businesses needing quick access to funds without the stringent requirements of traditional loans. However, they come at a higher cost and require careful consideration of the repayment structure. By understanding how MCAs work, the associated fees, and the pros and cons, business owners can make an informed decision on whether this financing option suits their needs.