wallet in pocket

Merchant cash advance is a form of lump-sum funding that is particularly designed for use by small businesses. This funding involves short repayment periods (usually under 24 months) and is paid in small regular amounts, mostly paid on a daily basis. It is worth noting that the funding is not a loan as the money is based on the business’s future credit card sales or revenues. Before these advances are given to any business, the provider has to evaluate the business’s credit card payments influx to ascertain whether the business will be able to repay the grant. Despite MCAs being seemingly beneficial to business, are they really necessary? Should you take MCAs?

money and piggy bank
They are quick

Merchant cash advances are processed quickly within a few days. This is because the processing of the funding does not involve detailed paperwork. The providers take 1-2 days to study the business’s credit card records to determine whether the business qualifies for a cash advance. There are lots of financiers who offer this type of funding, and as such, it is relatively easy to find a financer within your locality.

MCAs are unsecured

Merchant cash advances are unsecured, and as such, the business owner does not need to have collateral when applying for the advance. This protects the owner’s property, and assets incase sales decrease, and the business is unable to repay back the advance. However, to safeguard their interests, the providers of these advances may require the business owner to make a personal guarantee. This is an agreement that states that the borrower is responsible to personally repay the advance.

Repayment depends on sales

The best thing about merchant cash advances is that the repayment is made as a fixed percent of the day’s sales. Therefore, if the business makes low sales, then repayment will also be low. This goes a long way in ensuring that the compensation does not plunge the industry into financial hardships when sales go down. Repayments adjust automatically in respect to the performance of the business’s sales.

Why you need to be careful when applying for MCAs

Most business owners, especially the new ones often find themselves in a fix after applying for loans and advances whose terms they do not understand. This is why there is need to be cautious of MCAs so that you do not put your business in a situation it may never recover from. Reasons for exercising caution when applying for MCAs include:

Confusing contracts

The repayment structure and costs of MCAs may be confusing and hard to understand. Additionally, contracts for these advances are full of unfamiliar terms that may be hard to understand for new applicants. Due to this, you need to ensure that you understand all times before signing the agreement ad contract for the advance.

MCAs can put the business into unending debt cycles

The ease and speed with which MCAs are processed may put the business at the risk of entering into debt cycles which may be catastrophic for the industry. In the long run, these debts may pile up ad strain the business’s finances beyond the limit. If left unchecked for long, these obligations may cripple the industry and its operations.

Like in other forms of borrowing, it is advisable to be cautious of taking too many merchant cash advance. This may hinder the business’s growth and expansion especially a substantial amount of the sales is being used to repay the advances.