In the business world, ensuring cash flow and funding key projects is always a priority. One option that has gained popularity in recent years is the Merchant Cash Advance (MCA). But what exactly is it, and when should you consider using it?

1. What Is an MCA?

A Merchant Cash Advance is an alternative financing method that provides businesses with a sum of money in exchange for a portion of their daily credit card sales or cash sales, along with a fee.

It’s important to understand that an MCA is not a loan; it’s an advance on future sales. Therefore, it’s not extra money coming into the business but funds from the business's own sales. It functions similarly to factoring (used by B2B companies with accounts receivable) and comes with a fee for this financial service.

An MCA becomes a financing option when a business does not qualify for traditional or alternative loans.

Why Do Businesses Qualify Only for an MCA?

Here are the main reasons why some businesses may only qualify for an MCA:

1. Poor Credit History:
   This is the most common reason. A lack of strong business credit or poor personal credit from the business owner often disqualifies businesses from traditional financing. Banks and traditional lenders typically evaluate a company's or owner's credit history and their ability to repay based on that history. If a business has weak or underdeveloped credit, it is likely to be ineligible for a traditional or alternative loan. In such cases, an MCA may be the only available option, as it focuses more on future sales than credit history.

2. Lack of Financial Margin or Profitability to Repay a Loan:
   Businesses that report losses or minimal profit margins in their tax returns or financial statements may be perceived as lacking sufficient margin to repay a medium- or long-term loan. In such scenarios, revenue-based financing, such as an MCA, may be the only option since payments are directly tied to the company’s cash flow.

3. Need for Fast Funding:
   Sometimes, businesses require quick access to funds to seize business opportunities or cover unexpected expenses. Traditional loan processes can be lengthy and complex, making an MCA appealing due to its streamlined application process and rapid approval.

4. Lack of Collateral:
   Many traditional loans, especially those with terms longer than three years, require collateral, such as physical assets or personal guarantees. Businesses unable to provide such collateral may struggle to secure long-term loans. MCAs generally require fewer guarantees, as they rely more on future business sales.

Types of MCAs Available

Not all MCAs are the same. Here’s a breakdown of the various MCA types and considerations for business owners when choosing the right option:

a. Traditional MCA

The traditional MCA is the most common type. In this model, a business receives a cash advance in exchange for a percentage of its future sales. Payments are typically made daily or weekly, based on a fixed percentage of the credit card sales processed by the business. This type of MCA is known for its quick approval and disbursement, making it attractive to those needing fast access to capital.

b. Fixed Fee MCA

In a fixed-fee MCA, the business receives a cash advance and pays back the principal along with an additional fixed fee. Unlike traditional MCAs, which are repaid as a percentage of sales, this type has fixed payments, providing businesses with greater predictability in repayment and easier financial planning.

c. Future Revenue Purchase MCA

This variant involves selling a portion of future revenue in exchange for a cash advance. Payments are based on a fixed percentage of the business’s gross daily or weekly revenue. This option may suit businesses that generate revenue through cash or bank transfers rather than credit card sales.

d. ACH Deposit MCA

In an ACH (Automated Clearing House) MCA, payments are automatically deducted from the business’s bank account rather than being tied to credit card sales. This type is ideal for businesses with a steady cash flow through their bank accounts but limited credit card transactions. Payments are typically made daily or weekly, based on a fixed percentage of ACH deposits.

When Should You Use an MCA?

Consider an MCA in the following situations:

1. Immediate Cash Flow Needs:
   MCAs are ideal for businesses facing urgent cash flow challenges, whether to cover unexpected expenses, purchase inventory, or bridge short-term financial gaps.

2. Seasonal Businesses:
   Seasonal businesses often experience fluctuating income. During slower months, an MCA can provide funds to cover operating costs until business picks up again. Its repayment structure, linked to credit card sales, aligns with the business's revenue patterns, offering flexibility during low-activity periods.

3. Poor Credit History:
   For businesses with less-than-perfect credit, traditional financing can be hard to secure. MCAs focus on future sales rather than credit history, making them accessible to businesses with lower credit scores.

4. Expansion and Growth:
   Businesses looking to expand or launch new initiatives may need quick funding. Instead of waiting for traditional loan approvals, an MCA provides rapid access to capital, enabling businesses to seize opportunities while working toward long-term financing options.

What to Consider When Choosing an MCA

When selecting an MCA, evaluate the following:

• The total cost of capital, including all fees.

• Terms and conditions, including prepayment penalties.

• Repayment method (percentage of sales, fixed fee, ACH deposit, etc.).

• Impact on cash flow and profitability.

• Ensure the cost of capital is lower than the return on investment (ROI).

• Match the MCA term to the income recovery or ROI period.

• The reputation and experience of the lender.

• The reasons for not qualifying for other financing options and steps to improve them.

Working with a financial advisor can help a business evaluate its options and develop a solid financial strategy. An advisor can identify the best financing solutions tailored to the business's specific needs.

What Are the Alternatives to an MCA?

While MCAs can be helpful in specific circumstances, it’s important to explore other potentially more favorable long-term options:

1. Alternative Loans:
   Non-traditional lenders offer business loans with more flexible terms than traditional banks. These loans may have lower interest rates and longer repayment terms than MCAs but are generally more expensive than traditional or SBA-backed bank loans.

2. Business Lines of Credit:
   A revolving line of credit provides businesses with funds as needed, without committing a portion of future sales. This is particularly useful for companies that need flexibility in financing.

Conclusion

If your business qualifies only for an MCA, it’s crucial to understand the reasons behind this limitation and explore more favorable alternatives for the long term. While MCAs offer fast access to funds, it’s essential to consider their long-term implications and create an exit strategy to improve your financial standing.

At Capifinders, we not only help you access loans but also provide guidance, advice, and long-term support to improve your financial health without additional costs. Start your process today by clicking here.