What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a form of financing that can be particularly helpful for businesses that have low credit scores, or have a past track record that may not be lengthy enough in duration or profitable enough for banks or financial institutions to seriously consider them for other forms of financing.
Financing through an MCA means that the repayment terms will be different compared to many other forms of financing. MCA funders will look at different metrics and information in deciding whether to extend funding compared to typical financial institutions.
Conventional business financing mainly focuses on a business’s past performance and metrics like credit scores. Financing through a merchant cash advance focuses on looking forward and doesn’t seek to punish companies or their owners for past mistakes. That’s why an MCA can be one of the best solutions for businesses that have struck out in an attempt to obtain financing with traditional funders.
In addition to being favorable toward businesses that have a limited or less than stellar record of profitability or repaying financing, funding through an MCA also has several other advantages. Having access to credit on your terms can mean the difference between your business being stagnant or growing.
The key to obtaining capital, whether you're a business or an individual borrower, is a good credit score. However, if you do not have a good credit score, then all hope is not lost. You can still obtain financing for your business on terms that will allow your business to grow, hire new employees and take it to the next level.
1. Financing with an MCA, It’s Not All About Credit Score
Most lenders will start and stop the consideration of every business financing application with the applicant's credit score. It’s often true whether the applicant is a business or an individual, and no matter the type of financing product they are applying for.
A credit score is viewed as the best measure of a borrower’s ability to repay their financing.
However, by financing with an MCA, the funder is not entirely focused on a business's credit score or your credit. Instead, because a merchant cash advance is repaid differently than other forms of financing, the credit score is not the be-all-end-all of an MCA application like it is with other types of financing. Thus, it's wise to explore an MCA if your credit score is not as strong as your business’s fundamentals and future prospects.
2. Credit Scores Measure the Past, Not the Future
Credit scores are measured using a business' track record in repaying previous loans and financing. Nothing about credit scores has to do with the present functioning of a business. Instead, the business’s past success or failure in repaying funding is used as a rough proxy of its ability to repay future financing. What this misses, is that just because the business was either successful or unsuccessful in the past does not mean that it will have the same troubles in the future. Therefore, if you or your company have a less than stellar record of repaying past financing, then your credit score will reflect that.
The trouble with using credit scores as the sole measure of whether a borrower is a reasonable credit risk is that credit scores only reflect past trends. They do not reflect the present or future ability of a borrower to repay. In that respect, they can be inaccurate if the borrower’s present ability to repay financing is different than what it may have been in the past when the business was less profitable, had fewer customers, or was otherwise less successful than it is today or could be in the near future. Such a company would need to look out for financing that is not focused solely on its credit score, Merchant Cash Advance is one of those options.
3. MCA Financing Only Requires a Soft Credit Inquiry
Another advantage of financing through an MCA versus other types of funding is that qualifying for an MCA offer typically requires only a soft credit inquiry. These types of inquiries, in contrast to the hard credit pulls that many lenders utilize in determining whether to approve a financing application that a business or individual borrower will make, will not negatively impact your personal or business credit score.
A hard credit inquiry can make a business's credit score drop several points because it indicates that the borrower is actively seeking financing. A drop of even a few points in a credit score can mean an increase in the interest rate that is ultimately charged to the borrower. Therefore, even applying for financing (regardless of whether the business is approved or not) can mean an increase in the amount of interest the company will pay.
A soft inquiry, or soft pull, is where a company is merely looking for credit information without you necessarily seeking to obtain credit. A soft pull has no negative impact on a potential borrower’s credit score. Therefore, in combination with its other advantages, obtaining a merchant cash advance should not be detrimental to credit scores, whereas getting traditional funding could be.
4. Financing through an MCA can offer flexible terms that allow you to make payments at a healthy rate.
The payment amounts of an MCA are primarily based on a business’s revenue and ledgers. In exchange for advancing capital today, a funder like ourselves is purchasing a fixed amount of the business’s future receivables. As the business realizes revenue and earns income, it will pay a fixed amount daily/weekly/bi-weekly amount until the funder has been paid the full re-payment amount. This benefits the borrower greatly. If things go well and the business can earn more income than expected from when they first applied for and received funding from an MCA, they can repay the financing quicker or more comfortably than expected. Choosing the right payment frequency can help you plan payments right after the main receivables come in.
5. Obtaining Funding is Much Quicker Through an MCA Than With Traditional Funding
Financing through a Merchant Cash Advance allows a business to receive funding that they need in a much shorter amount of time compared with other types of financing. The traditional lending process can drag on for weeks and even months. First, the application that can take days, then the waiting for it to be approved, then the financing has to be extended.
Traditional lenders can drag these steps out for weeks. The long application process can drag your business into a deeper financial hole before even receiving the requested amount. This may severely harm your business if the financing needed is for a time-sensitive purpose. MCA financing is different from regular funding in this respect. With MCA financing, a business operator can receive funding as quickly as within one hour. They can then use those funds immediately for whatever purpose your business needs them.
6. Working with a Trusted Funder
Finding the right funder can put the power of quick financing in the hands of business owners. We have an established record of successfully working with borrowers that are satisfied with their terms of the financing and their experience with us as their funder. View our Better Business Bureau Reviews and our TrustPilot Reviews to learn more about what others are saying.
After working with us once, we’ll have your info on file. That means the next time you need funding, we’ll only need a few updates of your business documents to fund you within just minutes.