A merchant cash advance (MCA), or company cash advance, is a lump sum payment in exchange for a fixed proportion of your business’s daily credit card receipts. They are short term financing products that can have APRs as high as 200%+, varying terms, and daily obligations. Company owners consequently typically look for options like term loans or lines of credit.
Fundbox, who sponsored this article, is a great MCA alternative because of their flexibility and transparency in their financing. They give line of credit financing up to $100k and don’t require a personal credit check to begin. They provide competitive rates of interest and there is no prepayment penalty, letting you save money by repaying early.
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4 Reasons to Consider a Merchant Cash Advance Alternative
Most visit a merchant cash advance as fast financing to finance working capital demands like purchasing equipment or preparing to get busy seasons. However, an MCA may be expensive, difficult to understand, and based on charge card revenue. Further, some borrowers ladder them when there are better long term options. For these reasons, business borrowers should consider other alternatives.
According to Greg Powell, Head of Product Marketing in Fundbox:
“A merchant cash advance could be attractive to small business owners with bad credit or who process a lot of face-to-face trades, but they are extremely expensive. An MCA may have enormous prices and you don’t have control on how much of your receipts are deducted as a member of the fees you owe each week. This can be a huge proportion of your daily or weekly sales, which might cripple your business and keep you from growing — the reason why most companies want access to financing to start with.”
The top 4 reasons you should Think about a merchant cash advance alternative would be:
1. A Merchant Cash Advance is Expensive
A merchant cash advance is among the costliest forms of working capital financing. For reference, the typical annual percentage rate (APR) of a business cash advance is between 80 — 120%. This is because while the daily repayments and overall price of funds are mended, repayment timelines are changeable. The more time it takes you to repay, the greater your APR..
Many borrowers agree on this price because of poor personal credit or because of an MCA’s funding rate. But due to the high cost, some business owners are unable to keep up with payments. This also contributes to a lot of defaults and credit problems for the borrower.
For example, the default rate for an MCA is as high as 15% while traditional loans such as SBA loans just have default speed approximately 2%. While it could be argued that an MCA attracts borrowers which are more likely to default on a loan, it’s also apparent that an MCA is a very risky lending option due to its price.
And defaulting on an MCA isn’t the sole concern for small business owners. Since Greg Powell of Fundbox notes,”Even those tiny businesses which don’t default on their MCA may confront significant problems because of their high prices. For example, businesses can find that while they are able to keep current on payments, the MCA is siphoning off too much of the earnings, leaving the business owner with no funds to re-invest and expand their business.”
By contrast, there are lots of MCA options that offer APR prices from 10 — 50%, all of these with a much lower overall cost than an MCA. What is more, repayments are generally weekly or monthly, which puts less of a fiscal strain on a debtor than the everyday repayments required by an MCA.
2. Merchant Cash Advances Can Be Difficult to Comprehend
Merchant money advances (MCAs) may be hard to plan for because much of the prices and terms are variable. For instance, your true APR, your everyday repayment amounts, and your general timeline for repayment are not transparent. This makes it hard to budget and plan for the future.
Having a company cash advance, by way of example, your daily repayments are based on an MCA’s factor rate, which is the multiple you’ll repay your supplier within the life of your advance. The ordinary variable rate for an MCA is between 1.1 — 1.4. As an instance, if your variable rate is 1.3 and you borrow $10k, you would have to repay a total of $13k into the MCA provider.
After you get your lump sum progress you will pay the provider back every day through a holdback percentage of your daily credit card receipts involving 8 — 30 percent. If your holdback percentage is 15% and you also make $1,000 in one day in credit card sales, you are going to have to repay $150. If your charge card sales another day increases to 20%, then you may need to repay $200 that day. Repayments are automatically taken from your receipts.
A company cash advance alternative, by contrast, is more transparent with its cost and provisions. It’s possible to get the same lump sum payment as a merchant cash advance and also know your precise repayment provisions, such as the APR, total price of funding, repayment amount, repayment deadline. This helps you better budget and plan for the future of your business.
3. Merchant Cash Advance Funding is Typically Based on Credit Card Receipts
A traditional merchant cash advance (MCA) might be a terrific method to access a huge lump sum payment for working capital needs, but businesses who do not do a great deal of credit card earnings may not qualify. MCAs are therefore an extremely limited kind of funding that’s typically most beneficial to businesses who do a vast majority of their earnings via credit cards.
This can result in multiple troubles. First, in case you do not have monthly credit card sales around $10k per month you may not even be eligible for a traditional MCA. But even if you do have enough credit card earnings to qualify, the historic amount of your earnings will dictate the size of the lump sum payment you qualify for. This might limit your ability to borrow and limit the effectiveness of an MCA.
Along with traditional merchant cash advances, some lenders will also supply ACH Cash Advance (aka a Bank MCA or Bank Just MCA). These lenders will take into consideration more than just your credit card earnings, which opens the option up to more borrowers, but does nothing to facilitate the expensive, complex character of MCAs.
Luckily, business cash advance options are typically more flexible throughout the application process and qualify you based on either your personal credit or your business history. If you’ve got a strong overall company or have a top personal credit rating, it’s usually easier to qualify for larger amounts of financing with alternative choices.
4. You Really Need Long Term Capital
Many companies get a merchant cash advance believing they need short term funds, but they end up needing funding for longer than they expect. Further, some business owners find that an MCA is overly expensive and are forced to take out more MCAs to refinance or cover with another loan provider. The result is that you’ll be on the hook to repay more funds than you originally intended to borrow.
By comparison, merchant cash advance options can provide longer repayment terms in the start if you need a longer term alternative. If you don’t understand just how much you desire or if you’ll have the ability to repay, a short term credit line, for example, could be the alternative for you because it’s revolving.
Merchant Cash Advance Alternatives for Small Businesses
There are many affordable MCA alternatives which are more transparent and likely more suited for your requirements. These options consist of short term loans, lines of credit, and long-term loans. What is more, many of them can finance over 1-3 days. In the end, the right financing option for you will depend on your requirements and your borrower qualifications.
Frequent Merchant Cash Advance Alternatives
| MCA Alternatives | Finest For |
|---|---|
| Short Term Loan | Firms that need up to $500k in financing to fund a large business like buying equipment. Repayment terms are up to 3 decades. |
| Short Term Line of Credit | Businesses that need around $100k in a revolving line they could use over and over again to get unforeseen or recurring expenses. Repayment conditions are 6-12 weeks. |
| Long-term Loan | Businesses that need a great deal of funds to grow the company or make large purchases around $5 million. This really is the most affordable alternative and will have the longest repayment provisions up to a decade. |
1. Short-term Loan
A short-term loan is a lump sum payment typically borrowed as an alternative to traditional bank loans because of the speedy funding speed. Such loans are typically provided by online lenders that will have a look at the blend of your own credit history and company performance to approve you for a loan up to $500k.
A short term loan is a good alternative to an MCA because it is a less expensive lump sum financing agreement with fixed repayment provisions and increased transparency. You can borrow up to the amount you qualify for and generally have weekly or monthly amortized payments over the life of the loan. You will know just how much you’ll pay during every month of repayment, and you won’t have to make daily obligations like an MCA.
Who A Short Term Loan is Best For
A short-term loan is most appropriate for businesses with one-time working capital demands like gear purchases. Should you need more cash later you’ll have to re-apply and go through the underwriting process . Short-term loans are much better than MCAs and are great for owners who want backing around $500k and who do not get the majority of their earnings through credit card receipts.
Short Term Loan Prerequisites
The terms of your short term loans may vary by lender, but generally you can expect something similar to these conditions and ranges:
- Loan Amounts: $5k — $500k
- Funding Rate: 1 — 3 Days
- Repayment Conditions: 3 Months — 3 Years
- Payment Schedule: Weekly or Monthly
Minimum Qualification Requirements
You’ll typically qualify for a Short-term business loan if you meet these minimum standards:
- Credit Score: 500 — 550+ (assess your credit rating for free)
- Time in Company: At least 1 year
- Annual Business Revenue: $100k+
Short Term Loan Costs
Short term business loans will typically be completely amortized, but the total price will vary by lender depending on the interest and fees rates your creditor charges. The common price that you’ll see using these loans is the annual percentage rate (APR), which generally will fall within this range:
- APR: 30 — 50%
What a Short Term Loan is Missing
A short-term loan is excellent if you need a massive quantity of capital for a one time need, but should you need more cash in the future you’ll need to reapply. It may be frustrating going through the application process over and over again and you may gain more from a business line of charge if this is how it is.
Where to Have a Short Term Loans
You can get a short term loan through online lenders like Fundbox. They provide around $100k in funding without needing a personal credit rating to get started.
Greg Powell, Head of Product Marketing in Fundbox, states:
Their application procedure typically takes place completely online in approximately ten minutes. You’ll find a fast approval should you qualify and then could be financed in 1 — 3 days.
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2. Short Term Line of Credit
A short-term line of credit (LOC) functions much like a credit card. You’ll get approved for a maximum borrowing amount and be able to draw against that sum over and over again until you hit it. You will just pay interest on the amount borrowed. After you repay you are able to reuse your credit line because it’s revolving.
These short term line of credit products are typically found via internet lenders that can fund fast. These LOC products are better than MCAs since they’re revolving so that you can use them over and over again since you repay what you borrow. They’re also less expensive and do not require you to have plenty of credit card issuers.
Who a Short Term Line of Credit is Ideal For
A short-term line of credit is best for businesses with recurring cash flow problems that might need to borrow cash over once. Additionally, it is a fantastic fit for businesses who wish to prepare for unexpected expenses because you don’t need to use the funds until you want them also won’t have to pay interest on the part of the line you’re not currently borrowing.
Additionally, a small business line of credit may be good fit for those companies that are looking to steadily invest in their growth with time. By way of instance, companies that want to finance advertising campaigns, purchase materials in advance of the next major project, or expand their lineup of inventory might find a short term line of credit an extremely helpful instrument.
Short Term Line of Credit Terms
The terms of your LOC are going to vary by lender, but generally you can expect something like these conditions:
- Loan Amounts: $2k — $300k
- Funding Rate: 1 — 3 Days
- Repayment Conditions: 6 — 12 Months
- Payment Program: Weekly or Monthly
Minimum Qualification Requirements
You’ll be in a good position to qualify for a short term line of credit if you meet these minimum criteria:
- Credit Score: 500 — 600+ (check your credit score for free)
- Period in Business: At least 1 year
- Annual Business Revenue: $50k — $100k+
Short Term Line of Credit Prices
Your costs for a short term line of credit will fluctuate based on quite a few things, like the fees your supplier charges and whether or not your finances is fully amortized. Some providers require you to pay the identical amount of interest and charges, no matter if you pay back the loan, while others allow you to save cash by paying off what you owe early.
The common cost that you’ll see with all these line of credit products is the Yearly percentage rate (APR), which typically will fall within this range:
- APR: 15 — 40%
What Is Missing Using a Short Term Line of Credit
A short term line of credit is excellent for recurring working capital needs, however the total amount of capital you are accepted for is typically under a short or long term loan. Should you need more than $100k then this might not be the right match for you.
The Way to Have a Short Term Line of Credit
There are numerous online lenders where it is possible to get a business line of credit. Fundbox is one of the recommended small business line of credit providers. They provide up to $100k of funding, do not require personal credit to get started, and only request a minimum of 3 months of business transactions minimal. Additionally, they can finance in when 1 day.
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Long-term Loan
A long term loan is a lump sum payment just enjoy a short term loan, but with a longer repayment term of up to 10 years. These loans are typically originated by a conventional bank and therefore are more difficult to qualify for than the other funding options on this listing. It also takes much longer to go through the application procedure, taking 30 — 90 times to have financed.
A long-term loan is much more affordable than an MCA, with interest rates less than 10 percent and repayment provisions of 5-10 years. This really is a better alternative if you need long-term capital, are trying to make a large business buy, or if you are trying to merge or refinance existing debt.
Who Long Term Loans Are Right For
Long term loans are best for companies looking to refinance or consolidate costly business debt. By way of instance, a lot of merchant cash advance debtors wind up using long-term loans to spread out the debt that they incurred from the MCA since they can’t afford the payments. These loans are also the best alternative if you’re seeking to make very large purchases such as commercial property.
Loan Terms
The Quantity you borrower and how you’ll repay your Long-term loan will vary by lender, but generally you can expect something like these terms and ranges:
- Loan Amounts: $20k — $10 million
- Repayment Conditions: 5 — 10 Years
- Payment Program: Monthly
Minimum Qualification Requirements
You’ll typically qualify for a long term company loan if you meet these minimum criteria:
- Credit rating: Prime borrower with 680+ score (assess your credit score for free)
- Period in Business: At least 1 year
- Annual Business Revenue: $100k+
Long Term Loan Costs
Long term loans are the most inexpensive financing alternative to your retailer cash advance. These loans will likely have an interest rate for the duration of loan combined with some origination fees. The Entire price will generally fall within this range:
- APR: 6 — 10 percent
What a Long Term Business Loan is Missing
Even though a long term loan is the most affordable option, it can take time to get funded. Most long term loans require 30 — 90 days to fund that defeats the primary purpose of getting an MCA: speed. These loans also take up a lot of your time during the application procedure chasing down paperwork and answering questions from the loan provider.
The Way to Get a Long Term Loan
It is possible to get a long-term loan from a traditional lender such as a bank. You will likely need to speak in and meet with a potential lender face to face with all your documentation in hand before they’ll start processing your loan program.
Funding From Your Payment Processor
Another alternative to your company cash advance is to get funding via your payment processor. If you are thinking about an MCA, then you likely process a great deal of credit card payments. This may qualify you for funding from companies like Square or PayPal, that might already process these transactions for you.
These loans are generally offered for you without you having to apply, and you can accept them fast online from within your chip’s dashboard. These loans are for smaller funding demands under $100k plus they fund within 1 — 3 times. You may learn more by reading our review of Square Capital and PayPal Working Capital.
Bottom Line
A merchant cash advance is an expensive financing alternative typically used because of their low eligibility requirements or speedy funding speed. But, there are lots of choices to some merchant cash advances which you can qualify for which will fund faster than many MCA providers and at a lower cost. An MCA should therefore only be used as a last resort.
Fundbox is your ideal alternative to some retailer cash advance. They qualify you according to your own enterprise history instead of your own personal credit score. You can borrow up to $100k by filling out an online program that takes less than 10 minutes, and Fundbox can generally get you funded in as fast as 1 day.
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