Merchant Cash Advance Explained

A merchant cash advance, also known as a business cash advance, is financing based on your future credit card receivables. A merchant cash advance allows a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of the funds regularly flowing through the business’ merchant account. Merchant cash advances (are not loans, they’re advances based on the future revenues or credit card sales of a business. A small business can apply for an MCA or merchant cash advance and have funds deposited into its account very quickly.

The advance is paid daily as a percentage of your credit card sales Therefore, if your sales are high, your advance is paid off faster and if sales are lower, your payment is lower.

Usually, applicants go to one company at a time applying for a cash advance. The business owner’s credit is pulled by each lender. With the Small Business Resource Network, you can get multiple offers with one simple application, then select the one that fits best. Once an offer is accepted, an agreement is made between the small business and the merchant cash advance provider regarding the advance amount, payback amount, and holdback percentage. When the repayment agreement is signed, and the repayment process is set up, the advance is transferred to the business’ bank account in exchange for a future percentage of receivables or credit card receipts. Again, this type of merchant financing is paid daily as a percentage of your credit card sales This is called a “holdback percentage” and will continue until the advance is paid in full. If your sales are high, your advance is paid off faster and if sales are lower, your payment will lower giving you the flexibility you need to maintain operations during slow times. MCA’s or merchant cash advances eliminate the collateral required for a traditional small business loan which makes them easier to get.

The Cost of A Merchant Cash Advance

In general, cash advance providers may require 20%-40% (or more) of the amount borrowed. This percentage is called a factor rate (1.20 – 1.40). Make sure that you understand your return on investment, make sure that the benefits outweigh the cost. If it doesn’t, do not take the cash advance. Try reallocating funds, or maybe pulling equity out of your commercial property with a “cash out” refinance solution is a better option for your business.

IMPORTANT: There is a difference between the holdback amount a small business pays every day (as a percentage of their credit card sales or receivables) and the repayment amount for the whole advance. For example, a holdback of 15% and a repayment of 30% so it’s important for the business owner to understand the distinction. Your NetworkCare Agent will be there to help you understand and make the best decision for your current business needs.

Holdbacks are based on:

• Credit card volume
• How long it will take to repay the advance
• How large your monthly receivables are

Look at this advance…

The business owner is offered $10,000 and agrees to pay back $12,000. This means the payback, or factor rate is 1.20 or 20% of the advance amount. Moving forward, the business agrees to have 15% of its credit card transactions withheld by the advance company (the holdback) until the $12,000 is collected If the business is averaging $14,500 a month in credit card sales, approximately $2,175 would be withheld each month and the advance would be paid back in roughly five months. Average holdbacks are 10 20% but can be higher depending on business and owner stability.

Should You Get a Merchant Cash Advance?

• Business owners that need to access capital very quickly should apply
• have adequate cash flowing through their merchant account daily to make payments on the advance should apply
• have a loan purpose that can justify the potentially high expense of the advance should apply

Many business owners purchase more inventory in anticipation of busy seasons and holidays. They understand that revenue generating activities will likely produce a high return on their investment Many also use the cash advance to purchase needed equipment and for operation expansion.

Simple Required Documents

• Completed one-page application
• Valid driver’s license or other state-issued photo ID
• Proof of revenue – 3 business bank and processing statements
• Voided check from the business account you want to be funded

Best Practices:

1. Have your supporting documents ready for upload.
2. Review your results from your smartphone, computer or tablet immediately and select your offer.
3. Respond to correspondence from NetworkCare Agent right away.