The service known as a Merchant Cash Advance – or MCA – involves the purchase of the portion of a merchant’s future card sales at a discount. A merchant cash advance is not a loan but instead is the purchase of specified amount of future credit card sales that a merchant may make on a regular basis. The Merchant Cash Advance provider usually contracts with a merchant account provider to collect the purchased sales. The dollar amount that is received by the merchant cash advance provider on a given processing day is based on the merchant’s net card sales volume, including post-chargebacks, reserves and other processors related charges.
The purchase price paid by a merchant cash advance provider is effectively cash provided to the business for working capital for business needs such as advertising, equipment, renovations, taxes, expansion, inventory, and unexpected emergencies.
Usually the merchant cash advance provider will contract with the merchant account provider to receive payments directly from the merchant sales. Sometimes automatic clearing houses will grab these payments, in which case debits equal to the agreed percentage of the covered credit card sales are instituted by the processor from the merchant’s bank account though automatic clearing house transactions. There is also something known as the method of batch-splitting, in which the merchant allows the merchant account provider to forward the agreed upon percentage directly to the merchant cash advance provider’s bank account. The remainder of the money is then deposited into the merchant’s bank account.
Since the re-payment of a merchant cash advance is based on a percentage of the future sales, the merchant cash advance provider will usually receive their money on a daily basis. However, if the merchant has to pay more than what is known as a safe retrieval percentage, they run the risk of going out of business. As an example, if your retrieval percentage rate is 12%, you should make sure that your mark-up is higher than this rate to cover this extra expense.
Most merchant account providers have a relationship with a merchant cash advance provider. Some merchant cash advance providers increase the retrieval percentage without the merchant’s expressed consent if the merchant’s sales drop significantly and the provider is not receiving their money back in a timely manner. This something worth going over with both the cash advance provider and merchant account bank.
Unlike traditional capital loan sources, merchant cash advance providers usually require simple paperwork and can allow you to go from the application process to completed funding in less than a business week. There are merchant cash advance providers that do not require personal collateral to secure the merchant’s ultimate repayment obligations.
Some merchant cash advance providers will also require certain terms, such as requiring that the merchant not to switch to another provider. They will usually require the merchants to provider guarantees of performance as well.
Providers have several requirements for merchants to gain a merchant cash advance, such as having been in business for at least a year, already accepting major credit cards for sales transactions, a minimum overall processing volume average, and providing a number of months of credit card transaction processing statements.
In the end, cash advances will help your business overall because some start-up costs in many instances are best paid with liquid assets. The worth of your future sales can easily pay for this.