Friday, May 17, 2024

Merchant Cash Advance: A Tool for success or indebtedness?

In the United Kingdom and other parts of the world, a successful business needs working capital and constant cash flow.

It is mainstream for every business to experience downtimes when it is difficult to make money. When this occurs, business owners seek different funding sources.

In this piece, we will discuss the concept of a merchant cash advance, which will be helpful for business owners looking for funding sources to sustain their businesses.

What is a Merchant cash advance?

Is a funding source for business owners who cannot get funds from banks and other institutions. It is a lump sum given to businesses in exchange for credit card sales. It’s not the same as a traditional loan because the technical details of both long-term and short-term loans are absent. Some of these technical details are fixed repayment terms and collateral.

With a merchant cash advance, the lender grants the business owner a cash advance instead of an invoice. Then, the invoiced amount is repaid at a fixed date alongside an advance fee.

Companies that give this product do not refer to themselves as lenders because they are not within the confines of regulations that traditional lenders obey. More so, they are flexible in how they provide funds to small businesses.

The highlights of this type of business financing

Every business owner needs financing for their business at some point. And in recent times, a merchant cash advance has become more popular for businesses that want to meet their financial goals.

As opposed to taking a traditional bank loan, here are some reasons why MCAs are a good financial tool:

1.      Less paperwork and easier approval

The conditions are not as challenging as taking a traditional loan. If you are taking an MCA, your bank and financial statements don’t need to be vetted. MCA providers have seamless requirements that are great for startups and small businesses.

2.      Modifiable credit requirements

Unlike banks, MCA providers don’t work with the results of your credit report and credit score. Even though an MCA provider checks your credit score, it is used for factor rate determination, and you will still get your cash.

3.      No collateral

An MCA is backed with future credit-card sales, so you don’t need to provide collaterals. You will receive the funding you need without risking vital assets.

4.      Quicker funding

Bureaucracies are typical of banks. This is why it requires a longer duration for loan request approval. On the other hand, when you apply, it takes 24 hours to get it approved. Sometimes, it might be a few days depending on the peculiarity of the situation.

Business owners consider it expensive financing

One of the main reasons business owners don’t consider an MCA is its high cost. Initially, the factor rate gives the impression that the debt will be low. However, you will discover that the interest rate is high. Sometimes, the interest rate is much higher than that of traditional lending sources.

By and Large

The truth is when you get this type of financing, it comes with requirements that affect the conventional operation of your business. Hence, before you opt for it, consider the pros and cons of the MCA provider. For instance, if you run a seasonal business, some MCA providers might prevent you from receiving cash because they can’t profit from those sales.

Be sure of what you stand to gain before you patronize a merchant cash provider.

Claire James
Claire James
Claire is an accounts manager at Fire Digital UK, an online publishing and content marketing company based in the North West.

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