The Ultimate Guide to Best Merchant Cash Advances in 2023

Are you looking for merchant cash advances or seeking information on merchant cash advances? We are SMB Funding. We are here to offer you and also tell you all our pro tips for an MCA.

What is a Merchant Cash Advance?

A (MCA) is a financial product in which a business receives a lump sum of money upfront in exchange for a portion of its future credit card sales. Unlike a traditional loan, an MCA isn’t based on an interest rate or fixed repayment term.

Instead, the repayment is based on a percentage of the business’s daily or weekly credit card transactions. The MCA provider takes this percentage until the entire agreed-upon payback amount is fulfilled.

If you go through an example, it will be easier.

Let’s say you own a bookstore, “Pages & Mugs,” that also sells coffee and pastries. You need $20,000 to renovate the space, add new shelves, and increase your coffee brewing capacity. Your business makes approximately $10,000 per month in credit card sales. A traditional loan might take too long or be hard to qualify for, so you turn to a Merchant Cash Advance

After reviewing your financial documents and sales history, an MCA provider offers you the following terms:

• Advance Amount: $20,000
• Factor Rate: 1.2 (This means you have to repay $24,000: $20,000 x 1.2)
• Holdback Percentage: 10% of daily credit card sales

 

How does a Merchant Cash Advance work?

A (MCA) is not a loan but rather a cash advance based on the future credit card sales of a business. In this arrangement, a business owner receives a lump sum amount from an MCA provider. The provider then collects a percentage of the business’s daily credit card sales until the entire agreed-upon amount has been repaid.

While the fundamental concept of an MCA remains the same in both countries—providing a lump sum amount that’s repaid through daily or weekly credit card sales—there are differences in regulations and market practices. In the USA, the market is larger, with many more providers. Canada may have stricter regulations and fewer providers, but the core product offering is quite similar in nature.

Think of an MCA like a balloon—you get it inflated (the lump sum) but have to let out a little air (percentage of sales) every day until it returns to its original state (the advance is paid off).

Qualifying for an MCA

To qualify for an MCA, you generally need to have:

• A minimum number of months in business (often 6 months or more)
• A specified minimum amount in monthly credit card sales (e.g., $15,000)
• Business bank statements, credit card transaction records, and sometimes even credit scores, although requirements can be more lenient than traditional loans.

Funding Options and Terms

Once approved, you’ll be presented with the following terms:

• Advance Amount: The lump sum you’ll receive.
• Factor Rate: A decimal figure (e.g., 1.2) that, when multiplied by the advance amount, gives the total amount you have to repay.
• Holdback Percentage: The percentage of daily or weekly credit card sales the provider will take as repayment.

Repayment Process

Repayment is usually automated:

• The MCA provider and your credit card processor work together.
• Each day (or week), a percentage of your credit card sales is automatically remitted to the MCA provider.
• This process continues until you’ve repaid the advance amount plus fees.

Think, If your holdback rate is 10% and you make $1,000 in credit card sales today, $100 will go to the MCA provider.

Factors that Impact the Amount Offered

• Monthly Credit Card Sales: The more you make, the larger the advance you could qualify for.
• Business History: A longer business history may result in better terms.
• Industry: Some industries are considered riskier than others, which could impact the amount or terms.
• Business Credit Profile: While not always a significant factor, it can still influence the decision.

Other Considerations When Applying for an MCA

• High Costs: MCAs are often one of the more expensive funding options.
• Impact on Cash Flow: The daily or weekly repayments could affect your cash flow, making it challenging to cover other expenses.
• Potential for Debt Cycle: If you’re not careful, you could find yourself needing another advance before you’ve paid off the first one, leading to a potential cycle of debt.
• No Benefit for Early Repayment: Unlike traditional loans, repaying early usually doesn’t offer any financial benefit.

It’s like getting a taxi instead of a bus—the taxi (MCA) gets you there quickly, but it costs more, and you have to keep paying as long as the ride (repayment period) lasts. The bus (traditional loan) might be slower and have more stops, but it’s generally less expensive, and you know when you’ll arrive (fixed repayment term).

Before entering into an MCA agreement, it’s advisable to read all terms carefully, understand the costs, and consider alternative funding options. Consulting with a financial advisor is also a good practice.

Advantages and Disadvantages of a Merchant Cash Advance

Advantages:

• Quick Access to Funds: One of the standout benefits is the speed at which you can get the money. Once approved, you could have funds in your account within a matter of days, if not hours.
• No Collateral Required: You don’t need to put up any assets to secure the funding, as MCAs are unsecured. This eliminates the risk of losing valuable assets like property or equipment.
• Flexible Repayments: Your repayments are tied to your daily or weekly sales. If business is slow, your repayments decrease; if sales are up, you pay off the advance quicker.
• High Approval Rates: Since MCAs focus on your sales history rather than credit scores, they often have higher approval rates compared to traditional loans.
• No Fixed Term: Unlike a loan, there’s generally no set term by which you have to repay the full amount. The repayment continues until the agreed-upon amount is paid back.

Disadvantages:

• Expensive Financing: The convenience and speed come at a cost. The factor rates can translate into highly high annual percentage rates (APRs), making MCAs one of the more expensive financing options.
• Cash Flow Impact: The daily or weekly deductions from your sales can impact your cash flow, affecting your ability to cover operational costs.
• Benefit for Early Repayment: Like traditional loans, where paying early can save you interest, MCAs have a set payback amount, determined by the factor rate. But if you wants to payback early then the mca providers also offer you a discount from the total payback amount.
• Potential for Debt Cycle: Due to the high costs and frequent repayments, there’s a risk of falling into a cycle of debt, particularly if you take out another MCA to pay off the first one.
• Limited Spending Scope: While MCAs generally offer flexibility in how you use the funds, they are best suited for short-term needs due to their cost. Using them for long-term investments may not be financially prudent.

Weighing these advantages and disadvantages will help determine whether an MCA is the right financial move for your business. Make sure to consult with a financial advisor to fully understand the implications.

Finding the Right Provider or Lender for Your Business

When you’re in the market for business financing in Canada or the USA, pinpointing the appropriate lender or provider can make a significant difference in your business trajectory. Here’s how to go about it:

Finding the Right Provider or Lender for Merchant cash advance

Different countries have unique lending landscapes. In Canada, you may encounter more provincial regulations, while the U.S. market might offer a broader range of options due to its size. Whether you’re north or south of the border, focus on lenders familiar with your industry and geographical challenges.

Researching Providers and Lenders

Dig into each lender’s reputation and track record. Online platforms and forums can offer reviews and testimonials. But go beyond the stars and ratings; read the comments to gain insights into customer service, dispute resolution, and overall reliability. Keep in mind the regulatory differences between Canada and the U.S. while researching.

Comparing Services, Rates, and Terms

Do not get enticed solely by low rates or fast cash. Make sure you look over all terms, such as the factor rate in the case of MCAs or interest rates for other types of loans. Examine any additional charges and fees and understand how they apply. Given the currency exchange rates and different economic conditions in Canada and the USA, it’s essential to consider the real cost of the loan or advance in your specific location.

Credit Score Requirements

Credit score requirements can differ between the two countries, given that Canada and the U.S. have different credit reporting agencies. Lenders in each country may also have unique criteria for creditworthiness. It’s crucial to be aware of these when applying for an MCA or other business loan, as you don’t want a denied application to further impact your credit score.

In essence, the process involves doing your homework, reading the fine print, and understanding the full implications of your choice. For personalized advice tailored to your situation, consult a financial advisor who is well-versed in cross-border business financing.

Is a Merchant Cash Advance Right for Your Business?

Determining if a Merchant Cash Advance (MCA) is the right fit for your business requires a careful evaluation of your financial needs, the nature of your operations, and your capacity to repay. Here are some key considerations:

• Cash Flow & Sales Volume: MCAs are best suited for businesses with consistent credit card sales. If your business experiences fluctuating sales, the repayments could strain your cash flow.
• Purpose of Funds: MCAs are generally more expensive than traditional loans. If the purpose is to handle a short-term cash need or seize a timely business opportunity, it might be justified. For long-term investments, other financing options may be more economical.
• Cost & Fees: Be sure to calculate the total cost, including factor rates and any additional fees. Can your business afford this level of expense?
• Repayment Terms: Consider the holdback rate, which is the daily or weekly percentage of sales that will go toward repayment. Make sure this rate is manageable within your profit margins.
• Regulatory Environment: Research the legal standing of MCAs in your jurisdiction, including any limits on factor rates or fees, to ensure you’re getting a fair deal.
• Credit Standing: While MCAs are easier to qualify for, especially with poor credit, the ease of qualification can be a double-edged sword. If your credit is good, other forms of financing may offer better terms.
• Long-Term Viability: Evaluate how the MCA fits into your broader financial planning. Will it help your business grow, or could it potentially lead to a cycle of debt?
• Consult an Advisor: Given the complexity and potential risks involved, consulting a financial advisor can provide you with a tailored assessment.

If your business needs quick funding, has a high volume of credit card sales, and has a plan for how to use the funds effectively, an MCA could be a convenient but expensive option. If the costs and repayment terms align with your business model and financial health, then it may be a suitable choice. Always read the fine print and consider seeking professional advice to make an informed decision.

How to calculate the cost of an MCA

Here are the steps to calculate the cost of an MCA:

Step 1: Identify the Advance Amount and Factor Rate

• Advance Amount: The lump sum you’ll receive.
• Factor Rate: A decimal number (e.g., 1.2, 1.3, etc.)

Step 2: Calculate the Total Repayment Amount

Total Repayment Amount = Advance Amount x Factor Rate

Example: If you receive an advance of $10,000 and the factor rate is 1.3, then:

Total Repayment Amount = $10,000 x 1.3 = $13,000

Step 3: Determine the Cost of the MCA

Cost of MCA = Total Repayment Amount – Advance Amount

Continuing with the example:

Cost of MCA = $13,000 – $10,000 = $3,000

Step 4: Understand the Daily or Weekly Payments (Optional)

Some MCA providers specify a “holdback percentage,” which is a percentage of daily or weekly credit card sales that will be used for repayment.

Daily or Weekly Payment = (Daily or Weekly Credit Card Sales) x (Holdback Percentage)

Example: If your holdback percentage is 10% and you have $1,000 in credit card sales for the day, you would pay:

Daily Payment = $1,000 x 0.10 = $100

Think of an MCA as a ticket to a special event. The ticket (advance amount) gets you in, but you know you’ll have to spend extra on food, souvenirs, etc. (the factor rate). The total cost of your day (total repayment amount) includes both the ticket and the extra expenses, and the difference between what you end up spending and the original ticket price is like the cost of the MCA.

Knowing how to calculate the cost of an MCA allows you to make an informed decision about whether this financing option is suitable for your business needs. Always read the terms carefully, and consider consulting a financial advisor to understand the full implications.

What happens if you default on a merchant cash advance

Defaulting on a merchant cash advance can have serious consequences for businesses in both Canada and the United States. While an MCA provides quick and convenient access to funds, failing to meet the repayment terms can lead to financial challenges and potentially harm your business’s creditworthiness.

In both the USA and CANADA, defaulting on an MCA typically results in penalties and additional fees being imposed by the lender. This can further strain your business’s finances, making it even more difficult to repay the debt. Additionally, defaulting may also damage your relationship with the lender, potentially making it harder to secure future financing.

In Canada, defaulting on an MCA could result in legal action being taken against your business. The lender may seek judgment through litigation or engage collection agencies to recover the outstanding balance. This legal recourse can negatively impact your company’s reputation and financial stability.

Similarly, in the United States, defaulting on an MCA can lead to collection efforts by the lender or third-party agencies. They may attempt to recoup their investment by seizing assets or garnishing future sales revenue through legal proceedings.

It is crucial for businesses considering an MCA to carefully assess their ability to repay the borrowed amount within the agreed-upon timeframe. Defaulting on this type of financing should be avoided at all costs. Seeking professional advice and exploring alternative funding options can help mitigate potential risks and ensure long-term financial stability for your business.

Where to Get a Merchant Cash Advance

There are so many MCA provider companies available all over the world. SMB Funding is one of the best in Canada and the United States.

Obtaining a merchant cash advance, and understanding where to look is crucial. Whether you are based in Canada or the USA, there are several avenues you can explore to secure this financial solution for your business.

In both Canada and the USA, traditional banks may offer MCA. However, the application process can often be lengthy and require extensive documentation. Traditional banks typically have stringent criteria that small businesses may struggle to meet. Some more MCA providers are Fundbox, Merchant Growth, Peerform, OnDeck, Driven, and Avant.

There are online lenders and specialized financial institutions that specialize in providing MCAs. These lenders understand the unique needs of small businesses and offer more flexible eligibility requirements compared to traditional banks.

In Canada, specific online lending platforms cater to Canadian businesses seeking a MCA. These platforms streamline the application process and provide access to funds quickly.

In the USA, there are numerous online lenders who offer merchant cash advances. These lenders often simplify the application process by utilizing technology-based underwriting algorithms, allowing for faster approval decisions.

It is worth considering engaging with a reputable financial advisor who can guide you through the process of obtaining an MCA tailored specifically to your business’s needs.

Remember that before proceeding with any lender or financial institution, it’s essential to do thorough research on their reputation and the terms offered. This will ensure you choose a reliable partner who can provide you with competitive rates and favorable terms for your merchant cash advance needs in Canada or the USA.

Merchant Cash Advance Terms and Features

(MCAs) have emerged as a popular financing option for businesses in need of quick and flexible funding. Whether you’re a small business owner or an established entrepreneur, understanding the terms and features of MCA is crucial in making informed financial decisions.

A MCA is a type of business funding where a lender provides upfront capital to a business in exchange for a percentage of their future credit card sales. Unlike traditional loans, MCAs offer unique terms and features that cater to the specific needs of businesses.

One key feature of MCAs is the repayment structure. Instead of fixed monthly payments, repayments are based on a percentage of the daily credit card transactions. This means that during slower sales periods, the repayment amount decreases, providing businesses with greater flexibility and reducing financial strain.

Another notable feature is the quick approval process. Unlike conventional loans that require extensive documentation and underwriting procedures, merchant cash advance applications are typically processed within days or even hours. This allows businesses to access much-needed capital swiftly in times of urgency or opportunity.

MCAs often don’t require collateral or personal guarantees. This can be particularly advantageous for small businesses with limited assets or entrepreneurs who wish to safeguard their personal finances from unnecessary risk.

Understanding the terms and features associated with MCA plays a vital role in utilizing this financing option effectively for your business needs. From flexible repayment structures based on daily credit card sales to quick approval processes and minimal collateral requirements, MCAs provide valuable benefits tailored specifically for entrepreneurs seeking accessible and agile funding solutions.

FAQ:

Can I get an MCA in Canada and the USA with bad credit?

Yes, it’s possible. MCAs are primarily based on your daily or weekly credit card sales rather than your credit score. Providers are more interested in your business’s sales volume because that determines your ability to repay the advance. However, having bad credit might result in less favorable terms, such as a higher factor rate.

Can I get a merchant cash advance with no bank statements?

It’s unlikely. Most MCA providers will want to see your bank statements to gauge the financial health of your business and to estimate your sales volume. However, some providers may consider other forms of documentation, such as credit card transaction records.

What type of business qualifies for an MCA?

Businesses with a high volume of credit card sales are the best candidates for an MCA. This includes restaurants, retail stores, and online businesses. The key requirement is that the business has regular credit card transactions, which provide the revenue for repaying the advance.

How do I qualify for an MCA?

Typically, you’ll need to:

• Have been in business for a certain minimum period, often at least 6 months.
• Meet a minimum threshold for credit card sales, often around $5,000 or more per month.
• Provide business financials like bank statements or credit card transaction records.

Are there restrictions on how the funding is used?

Generally, there are few restrictions on how you can use the funds from an MCA. Whether it’s for renovation, inventory, or payroll, the choice is typically yours. However, it’s advisable to use the funds for revenue-generating activities, given the cost of an MCA.

What is the interest rate on an MCA?

MCAs don’t have a traditional interest rate. Instead, they use a “factor rate,” which is a decimal number that, when multiplied by the advance amount, tells you how much you have to repay. The factor rate can be equivalent to a very high annual percentage rate (APR), often between 20% and 50%.

If you receive an advance of $10,000 with a factor rate of 1.3, you will have to repay $13,000 ($10,000 * 1.3).

Who Should Apply for a Merchant Cash Advance?

If you are a business owner in need of quick and flexible funding, an MCA could be the solution you’ve been looking for. Designed specifically for small and medium-sized businesses, a MCA provides access to capital based on your future credit card sales.

In the dynamic world of business financing, Merchant Cash Advances (MCAs) stand out as a flexible and immediate funding solution, particularly for small businesses in need of a quick capital injection. They provide the lifeline to navigate through financial uncertainties, temporary cash flow gaps, and unanticipated business opportunities. With the convenience of easy application processes and rapid approvals, businesses can focus more on operational growth rather than financial constraints.

In the vast ocean of financing options, MCA offers both an opportunity and a challenge. They can be the needed bridge to meet immediate financial obligations or the stepping stone to leverage growth opportunities. As with any financial decision, a careful evaluation of the business’s financial health, a clear understanding of the terms of the MCA, and a strategic approach to its utilization will determine whether it proves to be a boon or a bane. Do not hesitate to contact us (SMB Funding) if you need an MCA loan.