What is Merchant Cash Advance?
This is a type of business financing that provides funds to small businesses, in exchange for an agreed percentage of the company's future sales/income.
How does Merchant Cash Advance work?
A business borrows a sum of money from the financier (lender) and pays it back through customer card payments. This works for SMEs in the retail sector that accept card payments.
The process of getting a merchant cash advance is not as tedious as getting a traditional bank loan. In the case of MCA, the financier doesn't focus on the business's creditworthiness so it doesn't place high importance on credit history. Like almost any other type of financing, there might be extra charges, and the cost of merchant cash advances varies by lender. Some of the extra charges might include administration fees, an application fee or origination fees.
Merchant Cash Advance Repayment
A business usually pays back a merchant cash advance from its future revenue. The method of repayment can be in two ways:
• Percentage of customer card sales:
This is the most common way of repaying a merchant cash advance. In this situation, the financier (the lender) deducts a certain percentage of the debit or credit card sales of the business over an agreed period (daily, weekly or monthly) until the amount advanced is paid in full. Unlike bank loans, however, there are no specific repayment terms as the money is deducted based on the sales of the business. Repayment of Merchant Cash Advancement can take three months to eighteen months. And the rate of repayment is directly proportional to the rate of sales(the higher the sales, the faster the repayment of the advance).
• Fixed withdrawal from a bank account: Another method of repayment is to withdraw a certain amount of money (agreed upon by both parties based on the estimated value of the business's monthly income) directly from the business bank account. This method helps a business to calculate how long the repayment period would be based on the advanced amount. It is best suited for businesses that do not use card payments but can be risky especially if the business does not meet the estimated monthly income during a particular period.
Benefits of Merchant Cash Advance
Some of the advantages of Merchant Cash Advances for businesses include:
• Easy Application process: The process of receiving a merchant cash advance is not as rigorous as that of receiving a traditional bank loan. And unlike a bank loan where credit history and credit score are important, merchant cash advance only needs to gain access to a business's sales history and revenue records.
• Accessibility: Merchant cash Advance can be accessed in hours as they are processed quicker than a traditional loan. It is quick and it helps businesses gain access to cash in time.
• It is an unsecured type of business finance. This means that you do not need collateral and therefore a business is not at risk of losing its properties to the financier.
• It is a great source of financial solutions for Small and Medium Enterprises in the retail sector.
• Flexibility: Payment is dependent on the business's sales percentage, giving the business the flexibility needed to manage cash flow, especially during low sales.
Disadvantages of Merchant Cash Advance
Some of the disadvantages of Merchant Cash Advance are:
• It is expensive, especially in comparison to popular bank loans.
• It is not suitable for startups as the sales history of the business is required to gain access to it.
• It can affect the profit-making of the business.
Merchant Cash Advance vs. Invoice Financing.
Although both merchant Cash Advance and invoice financing are types of business financing, they do not operate the same way.
While merchant cash advance is given out based on a business's recorded sales history and future revenue, invoice financing companies work with actual sales records from a business's invoice (account receivable).
Some of the other ways merchant sales advance differs from invoice financing include :
• Invoice financing is less risky than merchant cash advances. Although there is a certain amount of risk involved in every type of business financing, factoring involves lesser risk since it is dependent on actual sales. Also, in a case where a business is already experiencing limitations in cash flow, merchant cash flow can make it worse especially if you're operating the Fixed withdrawal method as the money is automatically taken out from the bank at a particular period.
• Invoice financing maximizes cash flow while merchant cash advance does not. Invoice financing gives an exact amount based on a business's invoice which helps to determine what exactly the financing is for. It does not involve debts. In the case where a business takes a merchant cash advance to finance debt, it might cause a restriction in the cash flow of the business as the money does not help to generate more revenue for the business.
• Invoice financing might include some extra services that merchant cash advances usually don't. These services can help customers save money. A good example is our invoice financing service at Bridger. At Bridger, we provide you with online invoicing services where you can create, manage and send your invoices to customers. Also, there is an easy method of money exchange between a business and its customers without extra hidden charges. Bridger also helps your business manage and pay its customers. All these services are possible money-saving benefits that businesses that use invoice financing enjoy.
For businesses that might be experiencing a limitation in cash flow, Invoice financing is a great option. At Bridger, we offer business financing like Invoice Financing to other businesses. Get started here.