Small and mid-size business owners can now benefit from nearly-instant cash injections without the need to go to conventional financial institutions. Merchant Cash Advances (MCAs) are a popular way to get quick cash as they are considered a “sale of future revenue” enabling businesses to bypass the rigorous regulations and requirements of traditional bank loans. MCAs are ideal for working capital and can be utilized for a few different applications, as shown in the image below..
Benefits of MCAs for Borrowers: Quick Working Capital, Minimal Requirements, and No Collateral
MCAs are a viable alternative to traditional loans because they offer quick access to working capital with several advantages. Borrowers can receive funds in less than a week and repay them over a period of 3 to 12 months, without facing regulatory or credit hurdles. Unlike loans, collateral is not required for MCAs, which rely on future sales. Instead of committing to fixed monthly payments, borrowers pay a percentage of their sales, such as 8% of credit card sales. MCAs are particularly beneficial for businesses that rely on credit card sales, such as restaurants and retail stores, which constitute a significant number of MCA agreements.
Understanding MCA Structure: Factors and Repayment
Merchant cash advance (MCA) repayments can be structured as either fixed payments or percentages, dependent on the borrower’s chance of repayment. This determines a factor rate that lenders use to assess the overall repayment owed. The factor rate typically ranges between 1.2 to 1.5 and is determined by evaluating the business and the owner’s financial health, and its potential for future revenues. The total repayment obligation is the cash advance amount multiplied by the factor rate. For instance, if a bakery requires a $100,000 MCA, and the risk is low at 1.25, the total amount owed by the borrower will be $125,000. MCAs have a percentage-based repayment structure, and the speed of repayment is based on the volume of credit card sales or other sources of revenue.
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