At First American Merchant, we’re all about supplying businesses with the funding they need. Mostly, we do this through merchant cash advances, and though we talk about them a lot, we thought we’d put all the basics in one place for you. So here is everything you need to know.

Terminology

Before we get started, it’s important to clarify some terms. Merchant cash advance (also seen as MCA) and business cash advance are different terms for the same thing, which is what this article focuses on. Payday cash advances are personal loans, and are not associated with business cash advances.

So what is A Merchant Cash Advance?

At the most basic level, a merchant cash advance is the purchase of future sales. A financial institution or party purchases a certain amount in future sales so that a business owner can have the money for an upfront expense. The business owner than pays back the amount (and the agreed upon fee) incrementally as sales are made.

How does it differ from a Loan?

loan vs. cash advance

Working with the bank has never been an easy task. Traditional lending institutions have strict credit requirements, long wait times, complicated contracts, and require extensive documentation. They don’t lend money to high-risk factors, which many small businesses are.

Merchant cash advances, on the other hand, are often approved in less than 72 hours, with the money available almost immediately. There are no tax returns or financials required, simply proof that your business makes money. These are simple, flexible programs with a high approval rate, though open bankruptcies or overdue rent payments could still disqualify you.  Approval is based on the total gross deposits into your business bank account

The biggest difference is that bank loans come with interest. The faster you pay your loan back, the les interest you pay. With cash advances, you have an agreed upon fee, which can be up to 30% of the amount advanced. Your payments come out of your receivables, so if you make more money, you pay the advance off more quickly. If you make less, it will be slower. Either way, you pay the same amount.

Repayment

There are three main ways to repay a merchant cash advance:

  • Split Withholding is where the credit card processing company automatically splits the credit card sales between the business and the finance company per the agreed portion (generally 10% to 22%). This is the most common and preferred method of collecting funds for both the clients and finance companies since it is the simplest and most straightforward.
  • ACH Withholding is when the finance company receives the credit card processing information and deducts its portion directly from the business’s checking account using ACH (Automated Clearing House).
  • Lock Box or Trust Bank Account Withholding is when all of the business’s credit card sales are deposited into bank account controlled by the finance company and then the agreed upon portion is forwarded onto the business.This is the least preferred method since it results in a one-day delay in the business receiving the proceeds of their credit card sales.

 Pros and Cons

As previously mentioned, approval for a business cash advance is much simpler than dealing with the bank. Repayment terms are cut-and-dry, and are most often automatically taken through your credit card processing company, straight from your credit and debit transactions. This is simple and convenient, and also allows for the payments to come out when you have the money, rather than having a fixed payment due each month whether you’re making money or not.

Since merchant cash advances aren’t loans, they don’t affect your credit. There is also no collateral requirement, so your house, car, and other assets aren’t at risk. If your business goes under, you’re not required to finish making payments. This risk is why the fee is higher than bank loans, which are more secure for the financial institution.

The biggest downside to merchant case advance is that the fee is often more than a bank loan would be. So you might pay $63,000 for $50,000. Since most merchant cash advances are paid back in under a year, this is equivalent to a very high interest rate.

What should they be used for?

There is no official restriction on use for business cash advances, but it is wise to use them sparingly. With higher fees than most bank loans, they make the most sense for purchases with a high rate of return. So if you’re having trouble paying the bills, this isn’t the best solution. But for emergencies or large expenses, it is a lot less hassle than a bank loan. Typically, businesses use advances for new equipment, remodeling, buying inventory in bulk, or paying off debt and taxes.

Businesses that can be funded

Merchant cash advances can be used for a variety of businesses, including, but not limited to the following: (format list in some visually appealing- but still professional- way)

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Liquor Stores

Food Marts

Construction Companies

Contractors

Bars

Restaurants

Automotive Repair Businesses

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Nightclubs

Beauty Salons

Medical Practices

Hotels/Motels

Dental practices

Medical Marijuana Dispensaries

Retail Stores

How do I apply?

That’s the rundown on merchant cash advances. If you are considering this method of financing, make sure that you do your research, as you should with any financial decision. Look for a reliable and trusted company, and be sure that you understand all the paperwork. If you’re ready to apply now, start the process by clicking the button below.

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