Times are tough right now for many small businesses: inflation concerns, failing banks, and a recession on the horizon.
Many SMBs are struggling to stay afloat in an economic environment where access to capital can be difficult or impossible to come by. This predicament leaves many business owners in a difficult position when they require funding to cover monthly expenses and sustain their businesses until more favorable circumstances emerge.
However, there are alternative financing options available that can provide SMBs with secure, fast, and fair funding. Today, we are going to discuss one such option: the merchant cash advance (MCA). Read on to learn more.
The Problem With Traditional SMB Financing
Before we take a look at all things MCA, it will be helpful to quickly review some of the pain points of traditional big bank financing… pain points that tend to be a consequence of an outdated, one-size-fits-all approach.
Some of these challenges include:
- Stringent requirements: Banks typically have strict lending criteria, such as requiring a strong credit history, collateral, and a proven track record of profitability. Many SMBs may struggle to meet these requirements, especially if they are newly established or have limited financial history.
- Lengthy application process: The loan application process with traditional banks can be time-consuming, usually several months. This extended timeline can be problematic for SMBs that need quick access to funds to address immediate financial needs.
- Limited flexibility: Traditional bank loans usually come with rigid repayment terms and schedules that may not align with the cash flow dynamics of an SMB. This lack of flexibility can create added financial strain on businesses as they try to meet their repayment obligations.
Small businesses that are still working to establish their credit, or don’t have enough financial history, will be significantly limited when looking for funding via traditional channels, especially if they need capital in the here and now.
The good news is that, in 2023, merchants have better options. They can secure the cash they need, fast and with flexible terms, with a merchant cash advance.
What Is a Merchant Cash Advance?
A merchant cash advance is an alternative financing option that allows a business owner to quickly access capital. MCAs are ideal for covering temporary cash-flow shortages and unexpected business expenses.
Not a loan, an MCA is an advance against a merchant’s future revenues. MCAs are best suited for businesses that have revenues of more than $10,000.00 per month.
How Does an MCA Work?
A merchant cash advance provider will first review a business’s revenues and bank statements.
Based on the findings of this analysis, an MCA provider will determine how much funding they can offer and the repayment terms. Generally, approvals take less than 24 hours to complete, and everything is handled digitally.
Once approved, merchants receive capital in a lump sum, and repayment begins immediately. A percentage of revenues will be automatically debited on a fixed daily or weekly basis to pay towards the advance.
Before jumping into an MCA, merchants should read and understand the terms of their contract. Here’s what you can expect:
- Advance amount: the total amount you receive. Most MCAs range between $5,000 and $500,000. With Nexi, you can access credit lines up to $5 million.
- Factor rate: MCAs are calculated using a factor rate instead of an APR. Your factor rate will depend on the provider’s assessment of your business’ financing risk.
- Payback/Purchase amount: the total amount to be repaid (including fees).
- Payback frequency: unlike traditional loans, payments are due more frequently (either daily or weekly), as detailed in your MCA agreement.
- Holdback amount: the percentage of your daily revenues that will be paid toward your advance. The rate is usually between 10–40% and remains fixed until the debt is paid.
Because payment will depend on total revenues, MCA contracts typically don’t have a set repayment date. But keep in mind that the higher your revenues, the quicker you’ll pay off your advance.
Benefits of MCA Funding for SMBs
Now that you know what an MCA is, let’s get into how it can help your business—here are some of the unique benefits of merchant cash advances.
1. Flexible Terms
Unlike other types of SMB financing, your repayment rate will be based on a percentage of your daily sales. Payments are adjusted based on how your business is performing, thus cutting you some slack when sales are a little slower than expected.
2. Competitive Rates
Merchant cash advances can offer competitive rates that make them an attractive financing option for businesses in need of quick capital, especially for SMBs with a limited credit history or those deemed high-risk.
This is because MCA providers often tailor their rates based on the business’s financial health and revenue projections, providing more personalized and potentially favorable terms. This allows for greater flexibility and aligns with the cash flow dynamics of the business.
3. Positions Merchants to Improve Credit
Since it is not a conventional loan, an MCA does not directly impact your credit score in the same way that a traditional loan would. However, a merchant cash advance is a sound SMB financing option when credit history is less-than-ideal.
A merchant cash advance can also indirectly affect your credit score, depending on how you use the funds. If you utilize the MCA to pay off existing debt, make timely payments on your outstanding financial obligations, or invest in your business in a manner that improves your cash flow, it may contribute to a healthier credit profile over time.
4. Fast (Like Really Fast)
One significant benefit of merchant cash advances is how fast they are approved. Unlike traditional bank loans, which often involve a lengthy application and approval process, MCAs can be approved and funded within a matter of days, or even hours in some cases. The approval process typically takes 24 hours or less, and the funds are available within 48–72 hours.
5. No Need for Collateral
Traditional bank loans often necessitate that borrowers provide collateral, such as real estate or equipment, to secure the loan. This can be a significant barrier for small and medium-sized businesses that may not have substantial assets to offer as collateral or are reluctant to risk their assets in case of default.
With MCAs, merchants don’t need to risk their homes or any physical collateral to back up a cash advance. A merchant cash advance provider and the business agree to the terms and set up automatic payments during the enrollment process, thus avoiding the need to secure more assets.
Merchant Cash Advance FAQs
Let’s run through some typical questions and concerns small business owners have regarding MCAs. Don’t see your question? You can always drop us a line here to learn more about MCAs.
Can an MCA Hurt Your Credit?
Since a merchant cash advance isn’t a loan, it does not directly impact a business’s creditworthiness. Remember, MCAs are structured as advances on future revenues, so they do not appear on your credit report like traditional loans.
What Are the Fees and Costs?
The fees and costs of your advance will depend on several factors: the MCA provider you work with, the terms of the agreement, and the state you live in. Generally speaking, the primary cost of an MCA is the factor rate, which is a multiplier applied to the advanced amount to determine the total repayment amount. Factor rates typically range from 1.1 to 1.5, depending on the perceived risk and financial health of the business.
How Long Does the Approval Process Take?
As detailed in the benefits section above, the approval process for a merchant cash advance is typically much faster than that of traditional loans. In many cases, MCA providers can review and approve applications within 24 hours. Once approved, funds are often disbursed to the business within a matter of days.
What if I Can’t Make a Payment?
If you’re unable to make a payment for a merchant cash advance, it’s essential to remember that the repayment structure is designed to fluctuate with your business’s revenues. This means that your payments are a percentage of your sales, and they will naturally adjust based on your revenue.
In periods of lower sales, your payments will be smaller, providing a degree of flexibility compared to fixed loan repayments.
However, if your business is experiencing prolonged financial difficulty or significantly reduced sales, it’s crucial to communicate proactively with your MCA provider. Discuss your situation with them and explore potential options for adjusting the repayment terms or seeking additional financial assistance. Maintaining open communication and addressing the issue promptly can help prevent further financial strain and minimize any potential negative consequences for your business.
Leading MCA providers will also offer some form of MCA debt consolidation, with products like reverse consolidation that can help merchants with multiple MCAs lower their monthly payments.
Are Any Industries Excluded?
The short (and long) answer is no!
Reputable MCA providers like Nexi don’t exclude any industries, as long as the company meets the minimum requirements to apply.
How Can I Apply for a Merchant Cash Advance?
Applying for a merchant cash advance is a straightforward process.
For most MCA providers, you will need to submit an application that includes basic information about your business, such as its name, address, tax identification number, and financial details, as well as 3-6 months of bank statements..
MCA providers may also request additional documentation, such as credit card processing statements, sales records, accounts receivable, and tax returns, to assess your eligibility and determine the appropriate advance amount and terms.
To qualify for a merchant cash advance with Nexi, your business must meet the following minimum requirements:
- At least 12 months in operation.
- A minimum annual revenue of $100,000.
If your business fulfills these basic criteria, you will need to provide the following information during the application process:
- Essential details about your business (submit through an online application).
- Basic information regarding your invoices.
- Either a connection to your bank account or the three most recent months of your bank statements.
Generally, you’ll hear from us in less than a day.
Nexi: Leaders in SMB Financing
If you don’t qualify for a bank loan or you need capital now, a merchant cash advance is the perfect financing solution for your business.
Nexi is a leader in responsible financing for SMBs. Backed by our own alternative financing fund, we help SMBs thrive with fast, flexible, and secure funding. Whether you dream of expanding or need a little extra cash to get you through a rough patch, Nexi is here to help.
Ready to work together to achieve your business goals?
Apply today, or reach out to speak with a Nexi representative to learn more.
