In almost every business, there comes a time when an influx of cash will have a major impact. Whether you’re looking for funds to support an expansion, you want to purchase a new piece of equipment, or you need help with the monthly bills, a merchant cash advance loan can be an excellent option.
The following guide will provide an in-depth look at exactly how a merchant cash advance (MCA) works, some benefits and potential risks to consider, and tips on how to secure the best merchant cash advance for your business. When you’re through, you’ll have all the information you need to decide whether an MCA is the right choice for you.
What is a Merchant Cash Advance?
A merchant cash advance is a loan alternative for business owners. It allows you to receive a lump sum of cash upfront and repay it over time based on a percentage of your daily credit card sales. When you take out a merchant cash advance, you’re basically exchanging your future earnings for cash today.
How Does a Merchant Cash Advance Differ from a Business Loan?
While it’s common for people to use the term “merchant cash advance loan,” an MCA is not actually a loan at all. Instead, it’s an agreement with a merchant cash advance provider, who essentially purchases your future sales at a discount. Your payments to the provider fluctuate and are made with automatic withdrawals based on a percentage of your credit card receipts.
In contrast, a small business loan provides you with a lump sum of money in exchange for fixed payments over a predefined term. Business loans often have longer repayment periods, sometimes as long as 25 years. MCAs are short-term funding solutions that typically must be repaid within three to 12 months.
Benefits of a Merchant Cash Advance
There are many reasons to consider applying for a merchant cash advance. They can be an excellent way to access cash quickly and are often available to business owners who have bad credit. Here’s a closer look at some of the top advantages an MCA can offer.
1. Fast Access to Cash
Quick access to cash is one of the hallmarks of a merchant cash advance. While business loans can sometimes take weeks or even months to approve, some merchant cash advance providers (like Zinch) can provide almost instant merchant cash advance approvals. You can often expect to have an answer within 24 hours after you’ve submitted your information, and once you’re approved, you’ll receive your funding in as little as 48 hours.
2. Flexible Payments
Since merchant cash advance repayments are based on a percentage of your sales, when your revenue decreases, your payment amount will decrease proportionally. On the other hand, if your revenue increases, the dollar amount of your MCA repayment will increase as well. This can be an important benefit for business owners who are concerned about the stability of their revenues and want the peace of mind that comes with knowing they’re not committed to a large fixed monthly payment.
Having a flexible payment plan may make defaulting on a merchant cash advance less likely than defaulting on a traditional business loan. MCA payments are also automatically collected, either directly from your credit card provider or via automated clearing house (ACH) from your business bank account. Many business owners appreciate the convenience of not having to worry about missing a payment or getting stuck with late fees.
3. Easy Application Process
Applying for a merchant cash advance is super easy. There are no long, complex forms to complete and very little documentation is required. In most cases, you can complete the initial application process in about 10 minutes or less. This can be a major advantage when compared to a traditional loan, which often requires you to provide tax returns, profit and loss statements, account statements, and more.
4. High Approval Rates
Since MCAs are based entirely on your sales, you don’t have to have perfect business or personal credit to get approved. While reviewing your personal credit is often part of the underwriting process, it’s typically not a determining factor in the MCA provider’s final decision. Instead, the amount of funding you can receive is based on the amount of sales coming into your business.
5. No Usage Restrictions
While some types of business loans specify what the money can be used for, most merchant cash providers do not place any usage restrictions. During the pandemic, it was common for business owners to use a merchant cash advance for COVID-19 relief. Many businesses also use merchant cash advances for debt relief, advertising, remodeling, or even making tax payments.
6. No Required Collateral
Merchant cash advances are unsecured loans, so other than a percentage of your future sales, you won’t have to put up any other type of business or personal collateral. This allows you to access the money you need without worrying about risking your home, your vehicle, or your personal bank account. As long as you have a strong record of past sales, you should have a good chance of being approved, regardless of whether you have other available assets.
It is important to note that while Zinch does not require you to provide a personal guarantee as part of the MCA agreement, some providers may. This is an agreement that requires you to take personal responsibility for your company’s debt if you default. When applying for an MCA, it’s critical to read the fine print so you understand exactly what you’re getting into.
7. High Borrowing Limits
Last, but certainly not least, MCAs typically allow you to borrow a significant amount of money. For example, a Zinch Flex merchant cash advance offers funding amounts between $10,000 and $250,000.
The amount you’re approved for is typically based on the volume of your sales. This gives the lender some insight into the revenue that you’ll have available to repay your advance. The ability to access large amounts of cash in a lump sum can give you the leverage you need to make game-changing investments in your business.
Potential Risks of a Merchant Cash Advance
While merchant cash advances can be an excellent option for many businesses, they’re not right for everyone. As with every financial decision, there are also some potential drawbacks you’ll need to consider.
1. MCAs May Be More Expensive Than Other Options
Since a merchant cash advance isn’t a loan, there’s no annual percentage rate (APR). Instead, the fee that is charged is known as a “factor rate.” These rates can vary from one business to the next and are often based on a variety of factors, including the type of business you operate, the operating history of your business, the volume of your sales and cash flow, and more. Sometimes, the factor rate on a merchant cash advance can be more than the APR you would pay on a standard business loan.
However, in business, time is money. Even if the total amount of fees ends up being higher than what you would pay for other funding options, many business owners find the quick and easy access to cash well worth the extra expense.
2. You Must Meet Minimum Sale Requirements
Each MCA provider will have its own minimum sales requirements and some will also have other requirements, such as a minimum amount of time you must be in business. For example, Zinch offers MCAs to companies that have been in business for at least six months and make at least $10,000 worth of sales per month.
3. You Must Involve a Credit Card Processing Company
When taking out a merchant cash advance, you’ll need to work with both the MCA provider and your credit card processing company. You may want to find a provider that already works with the processing company you use. However, most business owners choose the MCA provider they want to use first, then switch to a compatible credit card processor. While this is typically easy to do, some business owners may consider this a drawback. Working with two vendors, instead of a single lender, can also sometimes slow down the approval process.
4. Repayments Reduce Future Cash Flow
When you’re planning out your business budget, you’ll need to keep in mind that the repayment of your MCA will reduce your future cash flow. If not managed correctly, the required payments can quickly become a burden. Before you apply for a merchant cash advance, be sure to weigh the immediate impact of a lump-sum infusion of cash against your ability to comfortably make payments in the future.
5. MCAs Don’t Help Build Credit
Since an MCA is not a loan, your payments aren’t reported to the business credit bureaus. This can be a drawback if you’re trying to build your credit, particularly if you’re a fairly new startup looking to build up your credit profile. On the other hand, taking out a merchant cash advance also won’t negatively affect your credit score unless you’re defaulting on a merchant cash advance.
While neither the advance itself nor your payments are reported to the credit bureaus, if you default on your merchant cash advance, your lender will typically report it. Since this can significantly pull down your credit score, it’s important to only take out a merchant cash advance if you’re confident that you will be able to repay it.
How to Secure a Merchant Cash Advance
If you’ve decided that you may want to move forward with a merchant cash advance, you’ll be glad to know that the process is fairly straightforward. While the specifics may vary depending on the provider you choose, the steps are generally the same.
1. Research Merchant Cash Advance Providers
The first and most important thing you’ll need to do is research your provider options. Since traditional banks typically don’t offer merchant cash advances, you’ll need to take your search online. While there are several merchant cash advance (online) lenders to choose from, some offer better terms than others.
As you start to do your research, be sure to pay attention to the provider’s reputation. Read reviews on reputable sources like Google, and check their social media. Also, do a search of the company name to make sure nothing concerning comes up.
Once you’ve narrowed down your merchant cash advance companies list, spend some time looking through their offerings, minimum requirements, and terms. Chances are, you’ll find one that will be the best merchant cash advance loan provider for your business needs.
2. Contact Your Selected MCA Provider
After you’ve selected your preferred MCA provider, you’ll need to reach out to them to initiate the process. Most providers offer a simple online form. Some give you the option to either complete the form online or give them a call to get started.
When you apply for a merchant cash advance, the exact process will vary slightly from one company to the next. For example, some companies handle the entire process online while others, like Zinch, will connect you with a representative who will take the time to learn about your needs and collect any additional information required to complete the approval process. If we’re not able to approve you, we’ll let you know right away so you won’t have to spend days wondering about your financial future.
3. Review Your Customized Proposal
Once you’ve been approved, you’ll receive a funding proposal that has been customized just for you. Your Zinch lending specialist will review the available financing alternatives with you and help you choose the one that’s best for your needs. You’ll also have the chance to ask any questions you may have, ensuring that you understand all the details of your contract before you sign it.
Whether you choose Zinch or another MCA provider, it’s important to read through all of the fine print in your contract. Since this is a binding agreement, you’ll want to make sure you understand exactly what you’re committing to. If something doesn’t seem right or you need additional clarification, always reach out to your representative. Do not sign any paperwork until you’re clear on all the details and you’re comfortable moving forward.
4. Sign Your Paperwork
When you’re ready to accept your MCA, you’ll just need to sign and submit your paperwork. Most online providers allow you to sign everything electronically, speeding up the process so you can receive your funding faster.
5. Receive Your Funds
Once you’ve submitted the contract, you’re all set. All you need to do is sit back and wait to receive your funds. In most cases, they’ll be deposited directly into your business bank account within 48 hours.
Is a Merchant Cash Advance Right for Your Business?
Merchant cash advances offer an excellent opportunity for you to get your hands on fast cash so you can take advantage of business opportunities or cover necessary expenses. The application process is very easy, and since approvals aren’t based on your credit history, you may be able to qualify even if you’ve been turned down for other types of financing options.
If you own a newer business and haven’t had the opportunity to build up a strong credit history or accumulate enough assets to qualify for a traditional loan, a merchant cash advance may be a great solution for you. And, since the process is so fast, MCAs are also an excellent option for business owners who don’t have time to wait for traditional loan approval.
If you think a merchant cash advance might be right for you, the experts at Zinch are here to help you explore your options. To learn more about Zinch Flex, contact us at (714) 500-6622. You could qualify for up to $250,000 in just 24 hours.
Frequently Asked Questions
As you try to determine whether a merchant cash advance is the right option for you, it’s important to understand exactly how they work. The answers to these frequently asked questions will help clarify some additional details.
What Types of Businesses Can Benefit from a Merchant Cash Advance?
Merchant cash advances can be an excellent financing option for certain types of businesses that have a high volume of credit card sales, such as restaurants, retail stores, and salons. Businesses that are impacted by seasonal fluctuations are also prime candidates for a merchant cash advance.
Since MCAs are based on credit card income, they’re only available to businesses that process credit card payments. If your business doesn’t accept credit cards, unfortunately, you won’t be able to qualify for an MCA.
MCAs can also be a good option for businesses that haven’t had time to build up a long credit history or for individuals who are looking for an alternative to business loans with no credit check. If you’ve been turned down for a traditional business loan, an MCA may be a viable option for your funding needs.
Can I Get a Merchant Cash Advance if I Have Other Loans?
In many cases, the answer to this question is yes. This is particularly true when working with Zinch, since we often offer larger advances than our competitors. In some cases, we may even be able to help you pay off your existing debt from other lenders if we find that it’s in the best interest of your business.
If you’re an existing Zinch client, you can also request additional funds before your MCA has been paid in full. Typically, you’ll want to have paid off at least 50% of your existing loan before requesting additional funds.
Is There a Cost to Apply for a Merchant Cash Advance Loan?
Every merchant cash advance provider has its own guidelines and fee structures. However, when you apply with Zinch, you never have to pay an application fee. Once you submit your application, our experts will review your information and provide you with a no-cost, no-obligation proposal. Then, you can decide whether you want to accept the offer. If you decide it’s not the right choice for you, you can simply walk away.
What Are the Best Uses for a Merchant Cash Advance?
While you can use a merchant cash advance for just about anything, this short-term funding solution can be extremely beneficial for covering certain types of expenses. Some of the best ways to use a merchant cash advance include:
- Stocking up on inventory – This is particularly advantageous when the opportunity arises to purchase inventory at a deep discount or for businesses that want to avoid supply chain strains.
- Paying for unplanned expenses – Funds from an MCA can be used to fix broken equipment, deal with building repairs, and cover other types of emergency expenses.
- Covering temporary cash flow needs – During unexpected downturns, an MCA can help you cover expenses like your lease payment, utility bills, or payroll.
- Paying off other debts – Sometimes, you can use a merchant cash advance for debt relief or avoid late payments and expensive penalties.
- Help with working capital – By helping to cover day-to-day expenses, an MCA can give you the extra breathing room you need.
Can You Pay a Merchant Cash Advance Off Early?
While some providers may charge a prepayment penalty, Zinch allows for early repayments with no extra cost. In fact, we offer early payment discounts. If you think you might want to pay off your merchant cash advance early, be sure to ask your representative to add an early payment discount added to your contract.
