Fighting cash flow uncertainty, one business at a time

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If there’s anything the pandemic, the Great Resignation and the resurgence of inflation have taught us, it’s that what we think is a sure thing might not be. This includes a company’s cash flow. Many companies have budget deficits. New companies can have even worse. Businesses that don’t yet have a lot of customers may offer better terms in an attempt to attract more business. Sweetening the pot can help overcome a customer’s initial skepticism. Just like an entry-level provider, a startup can offer Net 30 terms.

Offering Net 30 or Net 60 or even Net 90 terms is a great strategy for developing business relationships. But a company finds itself with a long time between the supply of a good or a service and its payment. But in the meantime, a company’s bills need to be paid, including salaries, which need to be paid no matter what.

What are merchant cash advances?

An MCA is technically not a loan. Rather, it is a cash advance based on a company’s credit card sales. A small business can apply for an MCA and quickly receive an advance deposited into their account. The company can offer Net 30 terms, but does not have to wait a month to get paid.

Businesses That Can Make the Most of Merchant Cash Advances

A merchant financing program is ideal for business owners who accept credit cards and want cash quickly and easily. An MCA program works to help them obtain funding. It is based on cash flow, which can be verified by company bank statements and nothing more. As a result, lenders in general will not ask for any tedious document requests.

This is different from what most conventional lenders require, such as financial statements, business plans, and resumes. With MCAs, a company’s credit card receipts and bank statements make all the difference.

Related: How to quickly increase cash flow for your small business

How MCA Programs Work

MCA providers do not weigh credit scores and risk like bankers do. A merchant’s cash advance company reviews a company’s daily credit card receipts. This is to determine if a company can repay the funds on time. Simply put, a business sells a fraction of its future credit card sales in exchange for immediate payment.

The small business owner and the MCA supplier agree on the size and duration of the advance, holdback and reimbursement amount. A hold is the portion of daily credit card receipts that will be held to reimburse MCA.

There is one charge contractors should be aware of: the factor rate. Normally, a business using a merchant cash advance will repay at least 20% or more of the amount borrowed by it. The factor rate is this percentage. The amount of holdback a business pays each day (a percentage of sales revenue) differs from the amount needed to repay the entire advance.

After agreement, the advance is transferred to the company’s bank account. The company will then use a future portion of the credit card receipts to reimburse the supplier. This holdback will remain in effect until the advance is finally paid in full.

Being able to access a business owner’s merchant account eliminates the need for collateral, unlike traditional small business loans. Since repayment is based on a percentage of the daily merchant account balance, the more credit card transactions a business makes, the faster it can repay the advance.

MCAs are percentage based. So, if transactions are lower on a given day, the drawdown of the merchant account will also be lower. This means that during a downturn in business, the company’s return on investment is relative to incoming cash flow.

ACM Warnings

Merchant cash advance rates can be significantly higher than other financing options. Depending on the companies, the fares can end up being excessively high. Therefore, it is crucial to understand the terms offered.

Related: Getting a merchant cash advance is easy, but repayment can be expensive

Merchant Cash Advance Eligibility

To determine approval, the lender will review bank and merchant account statements. Lenders are mainly looking for regular deposits and a certain amount of income or more per year. Lenders will also verify a company’s time in business. It’s not funding for brand new startups.

Take away food

Many companies have budget variances due to offering better terms to their customers or for any other reason. Merchant cash advances are one way to fill the cash gap. But borrowers need to understand the numbers and know what they’re getting into. Always ask questions if something is not understood – good practice when considering any form of financing.

Related: Need to access Fast Capital? Consider a merchant cash advance.

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