Businesses are often in need of a loan. Be it the purchase of equipment, working capital, inventory expansion, renovations or even an acquisition, a business will need money to finance the project. Bank loans are useful but not easy to obtain. Small businesses in particular have a hard time getting approved for bank loans because of the stringent requirements and long approval time lines. The recession has created an economic crunch that has worsened the situation further.
Some of the available small business loans are lines of credit, business cash advance, term loans, equipment leasing, secured or unsecured working capital loans, SBA loans, and franchise start up loans. All bank loans involve extensive documentation, projection of past and future income generation, review of credit history, collateral, and a convincing management and growth plan. In spite of doing all their homework, businesses may have to approach many financial institutions before they obtain a loan since the approval rates are not very promising.
Business cash advance, also called a merchant cash advance (MCA), is a much more attractive option for small businesses with immediate financing needs. Many private companies, banks, and credit card processing companies offer MCA to small businesses today. The interest rates are higher than bank loans, but the difference is not as much as it used to be just a few years ago. The paperwork involved is pretty minimal, and credit score … well, if it's good, great. If not then it will not hurt your chances of getting a cash advance though it may influence the amount of advance sanctioned. The approval cycle is quite short – anywhere from a few hours to 3 days. And the cash gets transferred into your business account in a few days to a week. That's just what makes MCA so popular – funds are available when they are needed the most.
The one prerequisite for the acceptance of an MCA application is a history of good credit card sales over the last few months (typically an average of $ 3000- $ 5000) and at least one year of having been in business. The merchant cash advance provider purchases a percentage of your future credit card sales receipts for the advanced amount. The discounts are managed at the credit card processor's end without the business or cash advance provider's intervention. This is good as the business owner does not have to keep track of payments or payment dates. Payments vary based on monthly credit card sales volume and is fixed as a percentage of credit card receipts. Business owner is relieved of the stress of meeting fixed monthly payments since the installation varies based on monthly sales.
As merchant cash advance is a purchase, its providers are not regulated under financial loan laws. There is no limit on the interest rates a cash advance provider can charge or any specific set of rules and regulations. It is advisable to work only with reputed providers to avoid being ripped off. Peruse the contract with a fine tooth Comb to make sure there are no hidden costs or ambiguous terms and conditions.
The merchant cash advance industry is maturing gradually and many large players are making efforts to regulate it to some degree. MCA is fast becoming a mainstream finance source for businesses of all sizes.