Times are tough right now—especially for small business owners.
With interest rates reaching a 16-year-high, traditional loans are out of reach for most. Fortunately, there are other options available beyond traditional lending.
In fact, you may be able to get money in just a few business days with a merchant cash advance—MCA for short.
Today, we’ll discuss the core advantages MCAs offer immigrant business owners, as well as uncover the main disadvantages. Then we’ll introduce three powerful alternatives to help you fund your business venture.
At the end of this article, you’ll have a good idea of what kind of funding works best for your business.
What Is a Merchant Cash Advance (MCA)?
A merchant cash advance (MCA) is an alternative funding option for small businesses, where you receive a lump sum of cash from a lender within 1-3 business days.
The amount of cash you receive depends on the value of your business’ credit card sales.
Rather than requiring monthly loan payments, a merchant cash advance lender takes a predetermined percentage of your business’ daily (or weekly) revenue.
This percentage is often called the holdback rate.
Note that MCAs are only available to businesses that accept card payments. Generally, cash-only businesses will not qualify for a merchant cash advance.
Benefits of MCAs for Small Businesses
There are many reasons business owners choose a merchant cash advance. Above all, an MCA provides rapid access to funding.
Whereas traditional loans can require several weeks of waiting, MCA issuers are able to provide a large amount of cash in as little as 48 hours.
That makes MCAs an ideal solution for business expenses that require immediate attention, like repairs and renovations.
In addition to their unparalleled speed, an MCA provides a few other advantages for small business (SMB) financing:
1. Superior Flexibility
With an MCA, you’ll only make payments based on what your business earns.
When credit card sales are up, you can pay back the MCA faster. Conversely, when credit card sales are down, you simply won’t have to pay as much.
This can make MCAs more appealing than traditional term loans, which have fixed monthly payments.
2. Accessible Requirements
It’s no secret that traditional loans have daunting credit score requirements.
Fortunately, MCAs are much more accessible.
In fact, if you’re new to credit or have a low FICO score, you can still qualify for an MCA.
After all, merchant cash advance companies provide capital based on your cash flow, not your credit.
3. No Collateral Requirements
Unlike a traditional loan, MCAs don’t require any additional collateral to get started.
This makes MCAs optimal for newer ventures, for businesses with limited assets, or for
businesses with assets already claimed as collateral for other loans.
Again, there’s only one thing MCA companies need to back up your loan: your credit card receipts.
Drawbacks of MCAs for Small Businesses
While the benefits of merchant cash advances are clear, they introduce several definite drawbacks you should know about.
The primary concerns include the following:
1. High Costs
MCAs are very expensive, especially when compared to other types of business loans.
Rather than featuring an interest rate, MCAs include a factor rate that gets multiplied by the lump sum. In most cases, the factor rate hovers between 1.2 to 1.5.
For example, let’s say you receive a $25,000 merchant cash advance. If you multiply that figure by a factor rate of 1.5, the total repayment would be $37,500. In other words, you would pay $12,500 just to receive the $25,000 lump sum.
Note: while it can be rather difficult to calculate an MCA’s annual percentage rate (APR), they can reportedly climb as high as 350% or more.
2. Confusing Rates & Terms
While MCAs are relatively easy to obtain, their contracts can be difficult to understand.
Here’s why: MCAs are considered a commercial transaction, not a loan.
Therefore, MCA companies are not bound by the Truth in Lending Act, the federal legislation that helps protect consumers from predatory lenders.
That’s why there’s no standardization in MCA contracts, no disclosure requirements (at least not at the federal level), and no effort to ensure consumers understand what they’re buying.
If you decide to pursue an MCA, be sure to clarify all factor rates, APRs, and repayment schedules before completing the transaction.
Important: if you have any questions or concerns, contact a financial advisor.
3. Debt Cycle Risk
Though an MCA provides a lump sum of cash, it also puts a claim on your incoming sales.
After all, most MCAs are repaid daily—or weekly, in some cases. That means the lender has a recurring claim on part of your revenue.
This can put a heavy strain on your business’s cash flow and profitability.
If you’re not careful, the daily deductions of an MCA could force you to tap another loan (or max out your credit cards) to help keep afloat.
That’s why an MCA can quickly initiate a debt cycle, which occurs when you’ve borrowed more than you can confidently repay.