If you have a retail business, whether online or a physical shop, you always have to maintain your running inventory. If you are forecasting 100 % sales of a product, that product needs to be on the shelf in your store. To manage this, most of the time, you would have to make cash payments, no matter how short you are on cash. In such situations, you might consider going for a Merchant Cash Advance.
A Merchant Cash Advance or MCA is like a loan that you secure against a percentage of credit or debit card sales transactions. In that case, you sell a portion of your future revenue against the advance cash. As it is not technically a loan, it doesn’t fall under the regulations of loans. It opens room for a significant variation in the terms and conditions of the MCA lender. Always go for the best merchant cash advance options available in the market.
In comparison to the bank loan, it is easier to secure, and the cash will be released to you by the lender within a few days. The repayments happen regularly as the cash from credit/debit card transactions get deposited into your merchant account. It has a short tenure as compared to other business financing options, such as a bank loan.
It is not the best financing option for a retailer as the factor rate on the initial cash is high, translating into an interest Annual Percentage Rate (APR) of approximately 100%. This higher APR is due to its short-term tenure, ranging from 12 to a maximum of 24 months. But if a retailer is not able to fulfill the credit score or time in business requirements for a bank loan, then to move forward, you can always secure a Merchant Cash Advance. Below you find some key points that you need to take care of to convince an MCA lender to give you the required cash.
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GOOD DEPOSIT HISTORY
Since an MCA directly links to your merchant account transactions, the lenders are not much concerned about your credit score. What they are most interested in is your cash deposit history. You would have to present to them the account statement of your merchant account for the last three months, at least. They will check the daily transaction ratio as well as the stability in the flow of deposits. Some lenders may ask for a more extended cash deposit history.
Because of this deposit history requirement, it is not a financing option for those to-be retailers who are just at the very initial stage of their business setup. However, if you are somehow able to set up and run your trade effectively with a merchant account just for three months, then it would be effortless for you to get an MCA.
NO OTHER MCA
The repayments of MCA take place continually as a percentage deduction from your incoming sales cash. The percentage of sales that goes to the repayments varies from 15% to 35%, depending on your agreement with the lender. Hence, it is evident that the lender would not want his money to go to someone who is already paying a percentage of daily sales to another party. Businesses need working cash to operate effectively. There is a minimum practical floor to this operating cash. Even if you pay 20% of your daily revenue to a lender, it is a pretty bad hit to your cash flow. Just imagine how it would be to pay 50% of your top-line daily and going out of business within a month.
NO LIENS ON BUSINESS PROPERTY
If you have your business property, such as your office building or merchandise delivery van, already tied to a mortgage or any financing option through collateral, then it puts a big question mark on your MCA application. It is somewhat understandable that they want to mitigate the risk as much as possible. And with a business owned property already at stake, there is a chance of their repayments getting affected without full recovery.
THE PROOF OF GOOD BUSINESS
If you have just started, you would not be having a long stable history of deposits in your merchant account. Let us discuss a business scenario where you have recently started a business, and it has been only a month. You want to secure an MCA, but you cannot produce the account statement for the last three months of your merchant account. However, you have received a big order, and the buyer has made the advance payment. You would still need more cash to fulfill the order.
In that situation, you can go to the MCA lender with a copy of the purchase order, and the finalized schedule of recurring payments from the buyer into your merchant account. It will help you in securing your cash advance even though you have failed to fulfill the critical requirement of submitting the proof of your deposit history, i.e., your merchant account statement.
TIME IN BUSINESS
Although it is not one of the main concerns of a typical MCA lender, it surely helps to make your application more eligible for approval. A trading business that has been operating successfully for five years is much less likely to go bankrupt within a year, as compared to a new startup that has been there only for four months and can close their operations if the business idea fails.
GOOD CREDIT SCORE
Again, it is not one of the most critical indicators for MCA lenders, as they are more interested in the daily percentage deductions of your sales deposits. Still, a good credit score makes your case stronger. Banks are more critical and have many in-depth procedures to gauge your financial standings. One of the significant parameters that the banking industry considers while providing financial assistance is your credit score.
But why would you go for an MCA rather than a bank loan, if you have a good credit score? There is no point in paying a much higher APR in the case of MCAs. So, the only legitimate case is where you need the cash fast and cannot afford to wait for weeks while the bank processes your business loan request.
Merchant Cash Advance is an easy way to finance your trading business. It may adversely affect your cash flow because of the high factor rate and can cause a deadlock in some situations. For companies that need quick financing without a lot of scrutinizes, getting an MCA is a viable option. Needless to say, once you have taken an MCA, you should keep an eye on your daily transactions, and short term forecasted cash flows until you conclude all the repayments.