Are you a business owner who needs immediate access to cash, but doesn’t want to deal with the lengthy and unpromising process of applying for a bank loan? If the answers yes, you may want to consider applying for a merchant cash advance (MCA). What is a MCA? A merchant cash advance is far from a loan. Instead, it’s a cash advance (hence the name) provided by a merchant cash advance provider, based on the volume of a businesses credit card sales. Essentially, businesses can sell a fraction of their future credit card transactions to gain capital promptly.
Why would a business owner apply for a MCA in the first place? When a business is looking to expand their product or service, but doesn’t have the amount of capital necessary at the time being, they turn to a MCA. For example, a business owner comes across an opportunity to hire more people and increase business. However, the owner realizes he/she doesn’t have enough capital to grow their actual space and doesn’t want to take out a loan. Knowing the businesses credit card transactions volume is exceptionally high, but has a relatively low credit score, the owner applies for a MCA.
How does the MCA process work? In order to be eligible to receive this advance, the merchant must first fill out an application for funding. Upon completion of the application for the respective MCA provider, the business has to provide documentation that includes their history of credit card transactions and bank issued statements. If the Merchant Cash Advance provider approves the business to receive funding, the next step is to finalize the details of the agreement between the two parties. The agreement includes the desired amount of cash the provider is advancing, the amount the business must repay the provider, and the holdback amount. Before breaking this down, you may ask what is a holdback amount? Otherwise known as the “factor rate,” the holdback amount is the dollar figure of credit card sales that is applied to the MCA. This rate is determined by the businesses volume of credit card transactions per month and the time it will take for the business to pay back the cash advancement.
For example, Alex’s Bagels is looking to get a $13,200 merchant cash advancement. The restaurant calls FlashBanc and tells them the amount they desire. After looking at Alex’s Bagels credit card transactions, FlashBanc agrees to provide Alex’s Bagels with the cash advancement for a repayment of $18,612 dollars. The two parties determined it would take approximately 12 months to pay off the advancement. This means that FlashBanc would withdraw $129 dollars a day or 1.4% of daily credit card sales from Alex’s bagels to satisfy the agreement between the two parties.
When considering whether a MCA is the right decision for your business, it is important to weigh all the factors. At FlashBanc, were happy to answer all these questions and guide you step by step through this process.