Why a Merchant Cash Advance (MCA) is Good if You Have Bad Credit

Why a Merchant Cash Advance (MCA) is Good if You Have Bad Credit

Small business owners know that as you expand and grow your business, so do your expenses. Previously the only way to gain capital for your business was to take out a traditional loan from your local bank. However, because of the “financial crisis” of recent years, banks have been forced to increase their lending requirements and business owners with bad credit have found it to be very difficult to find funding. Thankfully, the process has changed with the emergence of alternative online lenders who have stepped up to fill this large credit gap.  If you have poor credit history in your past, and your business needs to funding quickly, you should consider using a Merchant Cash Advance (MCA) funding program.

What is a Merchant Cash Advance (MCA)?

Merchant Cash Advance (MCA)
A merchant cash advance is a very popular financing option today for small business owners especially if the business owner has bad credit history.

A merchant cash advance is technically not a business loan. It is actually considered a cash advance against future revenue, meaning that if a lender decides to invest in your business, they provide you with a lump-sum of money in exchange for a portion of your business’ future sales. A merchant cash advance is a very popular financing option today for small business owners especially if the business owner has bad credit history.

How Does A Merchant Cash Advance Differ from a Personal Cash Advances?

Business Man Apples to Oranges Comparison
A business owner needs to understand that a merchant cash advance is much different than a pay-day-loan cash advance.

Unfortunately,  because of poor lending practices by personal loan lenders, merchant cash advance’s have gotten unfairly grouped with personal cash advances and as a result companies like Google & Facebook have banned the advertising of these business services. First, a business owner needs to understand that a merchant cash advance is much different than a pay-day-loan cash advance. Pay day loan’s charge high interest rates for individuals borrowing small amounts of money usually under $500 and require fixed weekly or monthly payments. Merchant cash advances (MCA) are available only to businesses with merchant accounts and established monthly revenue. Merchant cash advances care usually configured with payment options and rates based on the the lender taking a small percentage of the businesses monthly revenue. personal cash advance’s have a fixed payment schedule and if the borrower can’t pay on time large fees may be added to the amount owed.  In the case of a merchant cash advance utilizing Revenue Based Financing (RBF), if the business experiences lower than usual monthly sales, the businesses’ cash flow is not hurt because the payment amount is based upon the monthly revenue.  A merchant Cash Advance also allows business owners to borrow even if they have bad credit history.

Why Choose a Merchant Cash Advance for Business Owners with Bad Credit?

Businessman Road to Decision
There are few important reasons on why a small business owner with poor credit history would choose a merchant cash advance over traditional business loan.

There are few important reasons on why a small business owner with poor credit history would choose a merchant cash advance over traditional business loan. First, and foremost is because most traditional banks will not consider lending to business owner with credit scores less than 680. There are traditional bank loans in the form of the Small Business Administration’s  SBA 7(a) loan program that are available to business owners with average credit scores. However, the average time from application through approval can take up to 90 days before funding is actually provided. The primary benefit of a merchant cash advance is also speed. With the wide usage of fintech, a merchant cash advance can be approved and you can receive your funding in as little as 1 business day if you have all your paperwork in order. The next benefit is that many alternative online lenders have a relatively painless application process and require only a small amount of documents such as 3-6 months of merchant account statements to be approved. Still another feature of merchant cash advances is that they do not require any sort of collateral even if the business owner has bad credit history. Therefore, you will not need to forfeit any personal or business assets if you are unable to repay your advance. Finally, merchant cash advances are a great option for small business owners who may have bad personal credit history because many lenders will overlook minor credit issues as long as your business is in good financial health.

Business Finance Explained
Unlike a traditional bank loan which only allows you to repay your loan back with a fix interest rate, and fixed monthly payments, a merchant cash advance can be repaid in two different ways.

What is the Best Options to Repay a Merchant Cash Advance for Those with Past Payment Issues?

Unlike a traditional bank loan which only allows you to repay your loan back with a fix interest rate, and fixed monthly payments, a merchant cash advance can be repaid in two different ways. The first being Revenue Based Financing (RBF) where you receive cash in advance in exchange for a portion of your future sales, or the second being you repay your business cash advance by Fixed Rate daily or weekly drafts from your bank account, known as Automated Clearing House (ACH).

Revenue Based Financing (RBF) Explained

RBF is usually the best choice for business owners with past payment issues. It is often found that late payment history directly correlates with slow slumps in sales throughout the year. With the revenue based financing payment program, as your small business continues to make sales the Merchant Cash Advance lender automatically deducts a certain percentage our your credit and debit card sales until the amount you borrowed is repaid in full, plus interest. The repayment period is typically 3 weeks to a year and varies from business to business. The higher your sales, the faster you will be able to pay off your advance.  This does mean your repayment period can fluctuate as it is not likely you will make the same amount every month.

For example, let’s say you’re a restaurant owner and you need to borrow $50,000 for your restaurant, your lender and you will define a timeline to pay back the loan. Typically this is no more than a year. In addition, you will also decide on a rate that to pay back, let’s say for this case it’s 10 percent for 6 months. That means you will be providing 10 percent of your sales each month until your advance is paid off, plus interest. In fact with this option, if your business’ sales are down so is your payment size.

What is great about this option is, it adjusts to how well the business doing for optimal repayment. On the contrary, businesses often believe that the time they will pay off their advance will be much quicker than actually happens. end up doing, which makes this option not ideal to some so they opt for the second option of Fixed Financing. 

Fixed Rate Financing Explained

Merchant cash Advances have historically utilized a fixed interest repayment system, exchanging capital for a fixed portion of your sales. It tends to now be the least popular out of the two payment choices because as previously mentioned, you have to repay the same amount back each month regardless of how well your business was that month.

However fixed financing is appealing to some small business owners because it allows your business to pay off the advance faster. Instead of continuing to pay a fee every month, you pay if off daily or weekly, with am agreed, fixed amount until the advance is repaid. Keep in mind that with this option, if your business’ sales are down you still have to pay the same amount back. This kind of agreement takes a daily or weekly payment to be withdrawn from your account based regardless of your sales volume. Your repayment does not shift with your sales percentages, you pay the same amount every month no matter how much you make until the loan is paid off with interest.

For example, again your restaurant needs to borrow $50,000. You and your lender agrees that you will have 6-months to pay off the $50,000 advance plus 10 percent of interest which means you owe $55,000. That means you will owe $2,292 a week for the next 6 months regardless of how much revenue your business made that month.

To Summarize

Navigating through the different type of loan options and choosing which one is right for your business is no easy process. Merchant Cash Advances are a great option for business who need to capital quickly or have a poor credit history. Merchant Cash Advances are not loans, they are money advances in a form of a lump- sum based on your credit card transaction volume. There are two different options for repaying an merchant cash advance, the Revenue Based Financing (RBF) and Fixed Rate Financing. However, you decide to fund for the future of your business, we suggest doing your own research on a reliable lender before you borrow.

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