A merchant cash advance (MCA) is an alternative form of financing that small businesses or startups use if they do not qualify for traditional forms of lending and/or are financially strapped.
Traditional lending – through credit lines or the Small Business Association – for example, has more stringent requirements and has more stipulations on how the money can be allocated in comparison to MCAs. After financing with family and friends or attempting traditional methods, many companies leverage merchant cash advances.
Companies may rely on this type of financing to solve a short-term financial issue, expand, purchase an asset or inventory, launch a marketing campaign or other business venture, or redistribute debt.
Beware – it is not wise for businesses to use an MCA as a desperate measure to save a failing business. Use your discrepancy when obtaining or investing in a merchant cash advance.
Merchant Cash Advance Fundamentals
Merchant cash advance financing is a business transaction of a lump sum of cash in exchange for a percentage of a business’s future sales.
The funds are quite accessible – the application requires little personal information, approval rates are high, and the cash is deposited within a few days. Return on an MCA investment similarly has a quick nature.
Businesses are required to pay back the principal amount plus the additional cost from the factor fee. The factor fee is similar to an annual percentage rate, but it does not fluctuate with payments as the rate is determined in the contract and remains stagnant during the term of the financing. It typically adds 20% to 50% to the total repayment.
Either weekly or daily, the predetermined percentage of sales is withheld and automatically repaid to the MCA funder. This is called a “holdback,” and continues until repayment is complete. The factor fee calculation is based on sales projections, loan amount, loan length, and monthly sales.
Payment amounts fluctuate as sales vary, but there is a minimum amount that must be repaid even if sales are below this threshold.
The higher sales the business does, the quicker it can pay off the loan.
How to Receive an MCA for Your Business
First, you need to conduct research as to which MCA funders have the best reputation and which are the most reliable. Once you narrow it down, go through the application process.
The application typically requires annual and monthly sales, bank statements, a business plan, a business tax ID, and a social security number for credit pulls. Next, you will need to provide some documentation proving citizenship and the lease for the business space. The next step is awaiting approval – which can occur in as little as 24 hours.
Next is finalizing the details, like signing the contract and setting up credit card processing. You will receive the funds within a few days.
At this point, payments will be automatically remitted either weekly or daily.
How to Invest in an MCA
A crowdfunding investment platform, like Supervest, makes merchant cash advances the best alternative investment option. It also introduces a new asset class to accredited investors, as these opportunities were only available to insiders within the industry until recently.
If you are an accredited investor, you have a special status under financial regulation laws and you can invest in MCAs.
First, fill out and submit an application with minor personal and financial details. Next, complete a risk assessment to help the platform match you with the best fit for MCA funding companies and then businesses. Then you receive a background check, decide how much you want to invest, and then start receiving your return in a few days.
When MCA is good for Businesses
An MCA is great for a business that needs to solve a short-term financial issue, purchase inventory, purchase an asset, redistribute debt, expand, or launch a marketing campaign or other business venture. Many different businesses use merchant cash advances to help get through slow periods; this is especially useful for industries that are seasonally-based, such as retail and food & beverage.
Cash advance financing is a safe bet for companies that can swing consistent sales in the future to cover the costs. For example, a car dealership that stocks up on inventory before a huge black friday sale will be more than able to cover the cost of an MCA due to the sales that the weekend will bring in.
When MCA is good for Investing
As an investor, it’s a blessing to know that a more connected world makes diversifying investments across a multitude of traditional and alternative platforms easier.
A great merchant cash advance investment is with a business in a high-growth industry, has increasing sales, has innovation, and can adapt to a changing environment. Many businesses are on the verge of greatness and simply need a little extra capital to push them to the next level.
Supervest connects investors with MCA Funders according to personal preference and risk. This provides investors the opportunity to be thoroughly involved in their investment – they have the power to decide which businesses work best for them.