When Banks Say No, Merchant Cash Advances Help Small Businesses
They say the best way to get a loan from a bank is to convince them that you don’t need one. That is painfully true for a lot of small businesses who need a quick influx of cash.
About 80% of small businesses will fail due to cash flow issues. And yet, the big banks are still turning away about 75% of small business loan applicants. It’s a vicious cycle. You need money to grow your business, but banks won’t work with you until you grow, but you need the money to grow, and so on, and so on.
This seems unfair and it has frustrated far too many small business owners to count. It’s also caused a number of them to close their doors forever. Why isn’t there a financial help solution for the people who need it the most?
Well, the help you need is available and a merchant cash advance company could be the answer you’re looking for. They can help your business get the cash you need, quickly. They’re also willing to work with small business owners like you.
They are a popular choice for entrepreneurs and small businesses that need money to grow (or survive). They are not the perfect choice for everyone, but they could be what you need.
Here is a deeper dive into the merchant cash advance.
What is a Merchant Cash Advance?
If you’re looking for a merchant cash advance funder, the first thing you should know is that an MCA is not a loan, which is part of the reason it could be more favorable to you.
Rather than borrowing an amount of money and paying it back in static incremental amounts, you work with a company that advances you cash in exchange for a percentage of your future sales.
These are typically a good fit if:
- Your business does more than $10,000 a month in transactions
- Your business could really use a fast influx of cash
- Banks and other lenders are not an option
The speed, accessibility and flexibly are the MCA’s key selling points.
How Does a Merchant Cash Advance Work?
In simple terms, you’re agreeing to exchange a sum of upfront money for a percentage of your future transactions for a period of time. But how does that work?
Repayment terms may vary. You may receive an upfront sum and repay the amount by remitting daily or weekly debits from your bank account, which is called Automated Clearing House (ACH), withdrawals. Or, you can pay via an agreed-on percentage of your future credit and debit card sales.
The fees you will pay will depend on the size of your advance and your terms. MCAs do not deal with interest rates. Instead, the provider will use a factor rate based on risk assessment, which is usually anywhere from 1.2 to 1.5.
The higher the factor rate, the more you will pay in fees. To determine your fees, you simply need to multiply the advance amount by the factor rate to get your total repayment amount.
- Say your advance is $50,000
- Your factor rate maybe 1.4
- This means your total repayment amount is $70,000
How Long is the Repayment Period?
Unlike a traditional loan, you’re (most likely) not paying the same amount every month for a set number of months. Because the repayment terms are tied to your business’ income, the length of the repayment period can fluctuate.
For example, let’s assume you’re MCA is for the $50,000 we discussed above, and you’re paying back $70,000. You would be allocating 10% of your future transactions until you’ve repaid the $70,000.
|If You Made $100,000 a Month in Sales||If You Made $70,000 a Month in Sales|
|You would pay $10,000 monthly||You would pay $7,000 monthly|
|You would pay off the advance in about 7 months||You would pay off the advance in about 10 months|
One of the most attractive aspects of the MCA is that your repayment schedule and terms will match the current state of your business. If business is good and sales are high, you will pay back your advance faster with higher payments. However, if sales are down, you will be making smaller payments.
This could give a business a chance to ease into repaying their advance, rather than having to be in a position to make a large monthly payment right away in 30 days.
When Would My Business Need a Merchant Cash Advance?
An MCA is a strong option any time you need money in a hurry, and/or banks are not an option.
Emergencies don’t care how well your business is doing, or what your business credit score is. If a disaster happens to your small business, you may need money to:
- Pay for repairs
- Replace equipment
- Make payroll
- Cope with a cash flow shortfall
Of course, the MCA’s usefulness is not limited to crisis situations. They can also be leveraged to take advantage of opportunities.
When growth opportunities arise, you often have a small window to take advantage of them. Maybe you own a food truck business and the chance to buy a second truck at an amazing price has popped up. Or maybe the office space right next to you has become available and you want to use it to expand.
Both of these situations are amazing openings for you to scale and grow your business, but you may not have the ability to get a bank loan, or the time to wait to go through the application process.
An MCA could help you seize the moment and the opportunity.
What if a Merchant Cash Advance isn’t Right for Me
There is no one-size-fits-all solution for businesses that are in need of funding. An MCA could be the best route for you, but there are other options.
If you’re unclear on who qualifies for an SBA loan you can click that link to see if your business meets the criteria.
At the same time, you can also click the following link to learn about a possible line of credit for small businesses to find the best option for you.
No two businesses are the same, nor are their financial situations. If your business is in need of funding, it’s always best to investigate as many options as possible to find the perfect fit.
Why a Merchant Cash Advance Could Be Better Than a Loan
Today’s banking world sometimes seems like it’s more set up to boost companies that are already doing very well, while not really helping those who actually need help.
The merchant cash advance could be your best choice if you’ve already been turned down by major banks, or you know for a fact it’s not worth your time to apply.
More Likely to Get the Help You Need
Merchant cash advances are not subject to the same stringent regulations that traditional loaning institutions and banks have to follow. Also, it’s harder to get a small business loan than it was 12 months ago.
This means a financing company is more willing to work with a business that may be traditionally seen as too risky for a loan. They are more likely to see your potential instead of your risk.
They recognize that small businesses need help and they have realistic terms that work for real businesses, in the real world.
A Fast Turnaround Time
The traditional loan process is long and involved. Again, it’s not really built for people who need money ASAP.
Going through a bank or other traditional lender often requires multiple trips to their office, as well as a pile of paperwork. This includes an intrusive deep dive into you/ your business’ history and current state, which may include your personal credit history and your business plan.
All of this can be a bit jarring, particularly if you go through all of this trouble just to get a “No” for an answer.
The MCA turnaround time is considerably faster and can even be as short as 24 hours!
You can also get the funds you need without putting up a large asset as collateral, which may be a condition for a small business loan or secured line of credit.
A restaurant may need money to quickly repair their oven. If they don’t meet certain lending criteria, they may be asked to put up a valuable asset as collateral to guarantee the loan. That restaurant may have to put up the same pizza oven they’re trying to fix.
We don’t have to tell you that risking a major asset is an uncomfortable proposition for a lot of businesses, as most of the big-ticket items they own are the lifeblood of their business. A delivery service may be asked to put up their truck, or a carwash may be asked to put up their tunnel system.
Is a risk you would be willing to take?
Low Sales = Low Fees
One of the most advantageous parts of a merchant cash advance is that you’re not under pressure to make a big monthly payment, every single month.
Your fees are a percentage of your income. Let’s say your fees are 10%. If you have a slow week with only $1,000 in sales, you will only pay 10% on that. However, if you have a much better week and bring in $10,000 in sales, you will be charged 10% of that and you just made a nice dent in your balance.
Again, it’s a solution for businesses that operate in the real world. More often than not, businesses need this money because something bad has happened. For example, a pipe has burst or a roof has started leaking and your insurance won’t cover it.
If you got a traditional business loan to deal with a crisis, you would likely be on the hook to make a monthly payment, starting a month after you’re approved. You would have to start paying it back right away, even though you might not be up and running at full capacity and earning less income while you get back on your feet.
The merchant cash advance gives you the flexibility to repay as you’re able.
Freedom to Spend the Money However You See Fit
Let’s say you need a certain amount of money for repairs, but you could also really use some funds to top up your inventory and pay down a bit of debt elsewhere. The MCA gives you the freedom to do so. Loans or other methods of funding may be a bit more limiting.
For example, if you decided to go the way of the Small Business Administration’s 504 loan program, you wouldn’t be able to use your funds to buy inventory. Or, if you were looking at SBA Microloans, you would need to know that they can’t be used to pay a debt or buy real estate.
If you have read this far, odds are good that a few of the benefits of the MCA have resonated with you and led you to suspect that this could be the best option for your business. This certainly could be the case. But, we always recommend you explore all of your options before committing to a particular option for lending or funding.
An MCA could be the right fit for you if you’re in need of fast-funding and traditional bank loans are off the table for whatever reason.
They have helped countless small businesses deal with crisis situations with a quick influx of cash. They have also helped many small businesses take advantage of a sudden and timely opportunity by helping to provide the funds the business needs, while offering flexible and realistic repayment terms.
If the bank says no, that doesn’t mean you’re out of luck or out of options. There are other possibilities out there for small businesses like you.
You can find a company that wants to help you, and sees the potential your business has, instead of just the risk you pose.