Taking Out A Merchant Cash Advance

With more and more people the world over starting their own businesses, the alternative business finance industry is booming. Not everyone wants to turn to traditional routes of finance such as bank loans when getting their ventures off the ground. For many, traditional finance just isn’t quite right. For many, alternative finance actually works out much better.

One form of alternative finance in particular which has been growing dramatically in popularity is a Merchant Cash Advance (MCA). An MCA allows a business to raise finance based on their credit card turnover.

Man paying at a till with Euros

How does a Merchant Cash Advance work?

When you take out an MCA, you’re typically given the equivalent of your monthly average turnover (inclusive of a small fee). You repay this money over time through your business’s card terminal receipts until the balance is clear. Unlike traditional bank loans, there’s no time constraint on this. In quieter times when less money is coming through your card terminals, you’ll pay less money back. In busier times when more money is coming through, you’ll pay more money back.

It’s a great option for businesses looking for quick and simple finance that won’t appear on your credit report. It’s not the right option for everyone though and it’s important to know whether it’s going to work for you…

Is an MCA right for you?

As mentioned, MCAs are designed for businesses that use a card terminal, as it’s based on credit card turnover. With this in mind, it’s perfect for shops, salons, cafes and restaurants – generally speaking, leisure based businesses where customers pay on card. If you run a taxi service, a plumbing business or a marketing agency, you probably mainly receive cash in hand or bank transfers, so an MCA won’t be right for you. 

AN MCA isn’t a one-size-fits-all finance solution. If you make the majority of your business through credit card receipts, then you tick the most important box as this is integral to the way this form of finance works.

Take your time

The alternative finance industry as a whole is still largely unregulated, so there are no limits on interest rates and repayment options. If you don’t take your time and do your research, you could find yourself stuck in a worse financial position than when you were originally seeking a loan so make sure you read all the small print to make sure that it’s going to work for you and your business. 

Whether you’re expanding your business or working on a specific project, decide how much it’s going to cost you in the early stages. Make a plan on how you’re going to spend your MCA money so that you don’t fall into the trap of spending money frivolously and not meeting your goals. The good news is that your MCA provider will be able to inform you on how much you qualify for but that said, there’s no harm in letting them know beforehand how much you’re initially seeking.

You’ll want to also decide on your repayment period in the early stages. This will depend on your business but it could be one month, or six. If you’re taking out an MCA to cover a one-off expense, such as new equipment, pick a shorter window and get it paid off as soon as you can. If the money is being used to cover a more long-term spend such as renovations, choose a longer repayment period.

Fail to prepare, prepare to fail

You’ll want to get your figures and paperwork in order when taking out an MCA. An MCA definitely doesn’t require as much paperwork as a traditional bank loan would but you will need to provide your credit card revenues so that a provider can work out how much they’d be willing to lend you. They’ll typically want a few months worth of bank statements and receipts, running costs and any other outgoings. 

Although there’s a much higher approval rate with an MCA than with a traditional bank loan, delinquencies and/or negative balances are still likely to send a provider running. If you’ve got a history of falling behind on payments or having substantial insufficient funds then you run the risk of being declined. Make sure that all your bills are up to date and paid on time.

If you are a business that makes the majority of its revenue through a card terminal and you require extra cash to reach the next step in your business, an MCA could be the perfect option. It’s much quicker than a bank loan and could be exactly what you’re looking for. If so, keep the above tips in mind to ensure that you get the best out of this product.

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