Need a Cash Boost? Working Capital Loans: Your Business Lifeline

When a business owner needs quick access to capital, they can leverage their credit card merchant account for a merchant cash advance (MCA), an alternative to traditional term loans. MCAs provide cash based on a business's credit card sales, with a quick approval process.

How does it work?

The Merchant Cash Advance (MCA) provider assesses risk through a unique lens, emphasizing daily credit card receipts or gross monthly deposits to ascertain repayment capability. Essentially, businesses trade a portion of their forthcoming credit card sales for immediate capital. Repayment occurs through a percentage deducted from daily credit card receipts, often at rates higher than those of traditional loans. To determine funding eligibility, the funder typically scrutinizes the most recent three months of business bank statements and/or credit card statements, averaging the gross deposits over this period. Based on this analysis, they may provide funding ranging from 100% to 200% of the average deposit amount to merchants.

Repayment and Costs.

Repayment entails withholding a percentage of daily sales until the advance is fully repaid. Typically, merchants repay 20% to 40% of the borrowed amount, known as the factor rate. The withheld amount varies depending on sales and repayment terms. If merchants don't process credit card payments, the funder examines monthly deposits and determines a daily or weekly amount to be withdrawn from the merchant's account until the receivable amount sold (RTR) is repaid.

For example, if a funder provides a merchant with $100,000 in average monthly deposits, a funding of $100,000 at a factor rate of 1.49 results in an RTR of $149,000 over a 6-month term, equivalent to 126 daily ACH draws. Therefore, the funder withdraws $1,182.54 daily from the merchant's account. If withdrawals are weekly, the amount becomes $5,775.20 per week. Withdrawals occur only on business days, excluding weekends and holidays.

Is it right for your business?

Merchant Cash Advances (MCAs) are ideal for addressing short-term capital needs such as inventory, payroll, tax liens, working capital emergencies, or marketing expenses, particularly for businesses with high credit card transactions but less-than-perfect credit. However, they are not intended for regular use due to their high costs and the potential for accumulating debt. MCAs are especially beneficial for merchants who require quick access to funds to address urgent financial matters.

For instance, if a pizza shop's oven, which is essential for cooking 1000 pizzas a day, breaks down, the business could face significant disruptions. Seeking traditional bank financing could take months and may result in a denial. In such cases, an MCA provides a swift and suitable funding solution.

Pros and Cons.

Advantages of Merchant Cash Advances (MCAs) include rapid access to funds, flexible terms, and the absence of collateral requirements. Unlike borrowing from credit cards or selling equity, MCAs do not impact your credit score or familial situation. They do not affect your credit rating whatsoever.

However, drawbacks include high costs similar to credit card payments, and minimal positive impact on your credit score, as MCAs do not contribute to its improvement.

Eligibility and Alternatives: To qualify, businesses need to either accept credit cards or maintain a minimum of $10,000 in monthly gross deposits in their business bank accounts, and they must have been operational for at least six months. If a Merchant Cash Advance (MCA) isn't the right fit, exploring alternative loans or working capital options from different lenders is advisable.

Application Process: To apply, simply click on the "Apply Now" tab above. Fill out the application with your basic business and personal details, and either upload your last three months' business bank statements or securely link your business bank account using PLAID. Approvals can be swift, with funds deposited within days.

Tips and Caveats: Merchant cash advances (MCAs) do not contribute to building business credit and may come with high-interest rates. It's important to ensure a positive return on investment (ROI) before committing. While MCAs provide fast access to capital for businesses with a defined repayment strategy, it's essential to weigh the associated high costs carefully.