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Merchant Cash Advance
A merchant cash advance (MCA) can provide working capital when you need it but can also carry heavy interest rates for small businesses.
What is a merchant cash advance?
When you receive a merchant cash advance, your business gains upfront working capital in exchange for a percentage of future credit card sales. Merchant cash advance companies frequently partner with credit card processing companies to hold back a percentage of credit card sales revenue. Merchant cash advance providers evaluate the credit risk differently than a traditional loan. The risk assessment is based off of daily and monthly credit card sales through a merchant account, length in business, along with credit scores to determine how timely the business can repay the advance. Typically, the overall cost of an MCA loan is higher because it is based on a factor rate instead of a specific period interest rate. This type of business cash advance is generally a short-term loan to get quick short-term working capital.
How are merchant cash advances different from a business loan?
Merchant cash advances are not small business loans. You are selling future income in exchange for immediate access to working capital. Instead of collecting payments to cover the advance, the merchant cash advance company will automatically deduct a set percentage of your debit card and credit card sales until they recover the advance. In contrast, other small business loans can be paid back using funds from other accounts, rather than being automatically withdrawn from your sales.
Most merchant cash advances carry high annual percentage rates and higher than average fees that end up raising the total cost of a loan. Because the daily repayment schedule can cause cash-flow problems, it can make it difficult to repay without refinancing.
Because merchant cash advances are not traditional loans, these agreements are not held to the same laws that regulate lenders and financing companies, so interest rates can be upwards of 38%.
Is a merchant cash advance a good fit for my business?
Merchant cash advances offer benefits to small businesses, including the payment schedule – you only pay back your advance when your business makes a sale that is paid by a credit card. If you have had strong sales but struggle with too little credit, less-than-perfect credit, or a bad credit score, a merchant cash advance may be a good option for your business.
What do I need to do to get a merchant cash advance?
Your business typically will not qualify for a merchant service cash advance if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not process credit card payments for your customers currently. This segment of the lending industry is not regulated, so it's important to understand the costs up front.
What other small business funding options should I consider?
While some small businesses may have turned to merchant cash advances in the past because they had few options to get the working capital they need, companies like Kabbage Funding™ are now a great option for small businesses.
Unlike merchant cash advances, an online loan through Kabbage Funding provides ongoing access to business funding – take what you need, when you need it, and only pay fees on the amount you use. You can even pay off your loan early with no penalties, and you won't be charged any fees on the remaining months. You can have access to capital when you need it without affecting your future credit card revenue.
The biggest difference between Kabbage Funding loans and merchant cash advance companies is the cost of funds business owners will pay on their business loan. Instead of complicated interest fees, Kabbage simply charges monthly fees between 1.25% and 10% for each month you have an outstanding loan balance. Merchant cash advance companies typically don't publish their interest rates and base them on the borrower's credit rating. That said, the payback for a merchant cash advance could be higher for business owners than expected as opposed to a business loan.
Whether your business needs capital for a slow season, or needs new business equipment, a small business loan line of credit with Kabbage Funding can help your business grow.
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