Starting a business comes with many challenges but the most common one is procuring the required finances. Whether you are a small retail business owner or run a restaurant, obtaining finances to pursue your passion is not an uphill battle. You won’t have to worry about your loan getting rejected due to insufficient assets anymore. If your business sees a bulk amount of debit or credit card transactions, you are eligible to avail the benefits of the Merchant Cash Advance scheme.
Merchant Cash Advance (MCA) schemes are targeted towards merchants or business owners in order to meet their short-term business credit requirements. MCA is a small business financing option wherein a merchant can borrow advance cash based on the credit or debit card sales of the business. With the rise in paperless transactions, more and more customers are opting for credit or debit card payment options for their convenience. However, if you are a business owner and offer point-of-sale machine service to enhance the shopping experience of your customer, this can assist you in getting funds through the Merchant Cash Advance scheme for the temporary financial needs of your business. This financial aid scheme is usually availed by merchants when they do not qualify for a regular loan from the bank.
What is Merchant Cash Advance?
As the name suggests, Merchant Cash Advance is an upfront cash advance that is received by a merchant in case he or she has temporary business credit needs and does not qualify for a bank loan. Under this scheme, the business owner is eligible for a lump sum cash advance that he or she can repay with a portion of the daily debit or credit card transactions received by the concerned business.
Once the financial lender and the business owner makes an agreement under this scheme regarding the advance amount, term of the advance, holdback, and payback amount, the advance cash amount is transferred to the merchant’s account. The business owner then needs to pay a predetermined percentage of the future card receipts, known as holdback, every day until the entire advance is completely paid back. Since the lender has the account details of the merchant, any additional collateral is not needed unlike other small business loans.
Features of Merchant Cash Advance
Before you choose to opt for the Merchant Cash Advance scheme, it is imperative to learn about its features.
Financial aid for temporary credit needs Based on the monthly card receipts of the business, a customer can withdraw a lump sum amount in order to fulfil his or her short-term financial needs.
Simple application process The application process of Merchant Cash Advance is far more uncomplicated in comparison to that of a traditional bank loan. Therefore, this credit scheme takes much less time to get approved.
Flexible repayment tenure Under Merchant Cash Advance scheme, an agreement is made between the lender and the merchant regarding the repayment tenure according to the monthly card statements of the business. The customer has to pay the entire advance in full within this period of time.
Quick credit disbursal During a temporary financial crisis, time is of the greatest import to overcome the situation. A customer will receive immediate funds transferred to his/her account if he or she chooses this financial scheme.
No collateral is required Since the loan amount is transferred directly to the applicant’s account, the credit lender has the bank account details of the business owner. Hence, there is no requirement to provide any collateral in order to avail this scheme. Due to this reason, any business owner can apply for this credit plan even when he or she doesn’t have adequate assets.
Hassle-free repayments depending on the business Under this scheme, the holdback percentage is determined using the sales of the business. Due to this reason, the repayment amount might increase or decrease depending on how the business is doing.
Other financial schemes can be availed simultaneously If you have availed the benefits of MCA, you can still apply for a different financial scheme for your business while repaying the debt of this scheme.
Key Points to Keep in Mind Before You Invest
Similar to every loan scheme, Merchant Cash Advance also has a few points that should be kept in mind before one decides to opt for it.
- As this scheme is centrally focused on the credit history of the business owner, the MCA provider might check the credit history of the applicant to learn about his or her repayment ability. However, if the enquiry results in a hard credit check, it might impact the individual’s future credit score.
- The Merchant Cash Advance scheme is regulated by the Uniform Commercial Code in each state owing to the fact that it is not a structured loan.
- Due to the requirement of daily repayment under this scheme, the cash flow of the business might reduce.
- There is no interest saving under the Merchant Cash Advance scheme if the repayments are completed before the decided tenure.
- While the Merchant Cash Advance plan provides financial aid when a merchant cannot opt for a regular loan, this scheme is extremely expensive when compared to traditional bank loans due to higher annual percentage rates (APR).
- The holdback percentage depends on 3 factors - the funds received by the business, the time required for the repayment, and the monthly card sales of the business.
How to Apply for Merchant Cash Advance
If you are a business owner and are having short-term credit needs, you can opt for the Merchant Cash Advance scheme using the following steps:
Application: In order to apply for MCA, a candidate will be required to fill out the application form along with providing the necessary details about his or her business such as business tax ID, social security number, and more.
Documentation: The applicant will have to provide credit card processing documents along with bank statements to verify the purchases of the business. Additionally, the individual will also be required to submit the documents for proof of citizenship and a copy of the lease to verify the location of the business.
Approval: Once applied, the Merchant Cash Advance application can get approved as quickly as 24 hours.
Switching credit card processors: Switching one’s credit card processor might be an inconvenience to many. However, the applicant might be required to do the same in order to avail this scheme.
Finalisation of details: Before the credit amount is disbursed, the lender and the business owner will have to finalise the details regarding the scheme such as advance amount, payback amount, term of advance, holdback percentage, and other necessary details.
Fund disbursal: Once all the details are finalised and the application is approved, the cash advance will be deposited to the applicant’s bank account and the process of repayment through the merchant’s account will automatically begin.
Eligibility Criteria for Merchant Cash Advance
The terms for the eligibility of Merchant Cash Advance are quite simple. Below mentioned is the list of requirements for MCA:
- The applicant should have a stable business
- The minimum annual turnover of the business should meet the requirement of the lender
- The business should have been accepting card payments for a decent amount of time
- The candidate should have a decent CIBIL score in line with the requirement of the financial service company
Documents Required to Avail Merchant Cash Advance
- PAN Card
- Proof of citizenship
- Proof of business address
- Statutory documents of the business
- Statements of an operative current account for the last 12 months
- Documents with details of all existing loans
- VAT returns of 6 months prior to the loan application
- Business financial documents for the last 2 years such as IT Returns, Balance Sheet, and Computation Sheet
- Proof of turnover citing the latest sales or service tax returns and Invoice/Purchase Order Copy
- Know Your Customer (KYC) documents of the promoter and company/firm
- Bank transaction statements of the POS machine for the previous 1 year
Methods for the Repayment of Merchant Cash Advance
When an applicant avails Merchant Cash Advance, the biggest concern is the repayment of the loan. The individual can choose to pay back the debt using three methods:
Split Withholding Method: This method is the most preferred method of repayment by the borrower as well as the financial services company attributing to the fact that the transactions using this method are completely seamless. Here, the credit card sales of a business are split into the predetermined percentage by the credit card processing organisation. These amounts are then credited to the respective accounts of the business owner and the financing organisation.
Lock Box or Trust Bank Account Withholding Method Under this method, the lender operates a bank account wherein the entire fund from the credit or debit card sales of the concerned business gets deposited. Thereafter, the lender deducts the repayment amount from the total fund and transfers the rest of the amount to the business owner using Automated Clearing House (ACH), Electronic Funds Transfer (EFT), or wire.
ACH Withholding Method There are two ways this repayment method can be applied.
- If the finance company considers the sale of the business for repayment, the processing information of the debit or credit card goes directly to the company. Then, the lending organisation can deduct the agreed repayment percentage from the checking account of the business directly using ACH.
- If the advance fund is considered a loan then the daily repayment percentage is deducted by the financial service company from the business’ checking account without taking the sales of the business into account.
If you are a business owner and need funds for your short-term financial requirements, your first choice is to go to a bank for a loan. However, getting a regular loan for a business in the leisure sector, or when the business doesn’t have enough assets, can prove to be quite challenging. In such a scenario, a business owner can opt for Merchant Cash Advance scheme wherein he or she can use the sales from the POS transactions received by his/her business. The funds received from this plan can be used to meet the temporary financial needs of the business without having to provide any collateral.