How does a merchant cash advance work?
A merchant cash advance company is a lender that offers a lump sum of money — called a merchant cash advance — to businesses in exchange for a portion of their future sales revenue. Advances can range from a few thousand dollars to $5 million or more.
Borrowers are typically set up for automatic repayments through a percentage of their debit and credit card sales or withdrawals from their business bank account. These payments are typically made daily or weekly, but, in some cases, may be biweekly or monthly, depending on your business and the MCA company.
MCA companies charge a factor rate instead of an interest rate. For example, an advance of $50,000 with a factor rate of 1.2 would require a total repayment of $60,000 ($50,000 x 1.2 = $60,000).
In addition to a factor rate, you may also pay charges such as underwriting, administration, setup or service fees. And some MCA lenders — Fora Financial and Libertas Funding, for example — offer prepayment discounts if you repay the advance early.
Term lengths vary by lender, but generally run from three to 24 months. And, in some cases, the MCA company may advance you additional funds if you’ve paid off a portion of the original advance.
Where to get a merchant cash advance
There are companies that specialize only in MCA products while others offer it in addition to other types of lending options.
Merchant cash advance companies
Some companies simply focus on offering MCA products, as is the case with Expansion Capital Group and Giggle Finance. While these companies often work with a variety of small businesses, there are some types of businesses they won’t work with. And other MCA companies may choose to offer their services to specific groups. For example, Giggle Finance offers its services to independent contractors and self-employed individuals.
🤓 Nerdy Tip
Reputable MCA companies are transparent about how their products work. This includes being upfront about the factor rate you will receive, additional fees they charge and repayment requirements for the advance. You shouldn’t feel pressured to sign an MCA agreement, especially if you don’t have a clear understanding of your obligations under the contract.
Online lenders
How to choose a merchant cash advance company
If you’re looking for a merchant cash advance, you’ll want to research and vet several companies before deciding which one is right for your business.
Some merchant cash advance companies have been criticized for confusing contracts and misleading sales tactics — leading businesses to fall victim to predatory lenders and cycles of expensive debt that are difficult to break.
Not all merchant cash advance companies are predatory, but it’s still important to watch for red flags — and look elsewhere if an offer doesn’t seem right.
As you compare MCA providers, consider these factors:
Funding availability
Merchant cash advance companies will have different maximum funding amounts. You should confirm that the provider’s requirements are in line with what you’re looking for. Some MCA companies also offer other more traditional types of financing like term loans and lines of credit. If you think you might be able to qualify for other options, you might explore those as well.
Costs of borrowing
Repayment options
Automatic deductions from your debit and credit card sales or withdrawals from your business bank account are your typical repayment options. If you have a preference, confirm that the option is offered by the provider.
Providers often require daily or weekly repayments, but in some cases you may find a provider that offers biweekly or monthly repayments or l will let you choose a frequency that works best for your business.
Qualification requirements
Many companies will also prioritize your debit and credit card sales or monthly bank activity when underwriting your application because you’ll be using your sales to repay your advance. Typically, the stronger your credentials, the lower the factor rate you’ll receive on funding.
Speed and application process
Most MCA companies offer simple applications with minimal documentation. You can usually apply and receive funding within a few business days. Some providers offer dedicated account managers to walk you through the process, which could be helpful if you prefer a more personalized experience.
Transparency and lender reputation
You’ll want to look for a merchant cash advance company that is upfront about its products and the way they work. Ideally, the company offers multiple ways for you to contact customer service — and you receive straightforward answers to your questions.
If you receive an MCA agreement from a provider, it should clearly lay out terms and conditions, fees and repayment information. In addition to talking to the company, reading reviews and reaching out to other business owners can help you verify the reputation and reliability of a merchant cash advance company.
Confession of judgment
Alternatives to merchant cash advance companies
It’s worth exploring other options besides merchant cash advances, which can include:
These loans may also have a lower overall cost than MCAs and many lenders have reasonable credit score and time-in-business requirements.
While business credit cards can have higher APRs than business loans, they would typically be more competitive than MCAs. Also, they often offer ongoing rewards and other benefits to the cardholder.
Invoice factoring allows you to sell your unpaid invoices to a factoring company at a discount. You receive an advance of cash (up to 90% of the value of your invoices) and the factoring company takes responsibility for collecting repayment from your customers. Once your customers have paid, the factoring company sends you the difference, minus the agreed-upon fees.
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