Tips on How to Get a Business Loan by Avoiding Banks

When you need urgent funds for your business, there are more than just banks to turn to. Merchant cash advance (MCA) or business cash advance is the easiest and quickest means of financing immediate business needs. Though a relatively new financing source, MCA is popular with small and mid-sized companies, especially those with less than perfect credit scores.

MCA is now offered by small and large finance organizations, banks and private companies. As the industry is still largely unregulated, unsavory players can try to get the better of you; fleecing you of your hard earned money. In this guide, we try to explain the ins and outs of merchant cash advance, its positives and negatives, and tips on selecting reputed MCA providers. The topics discussed include:

* Merchant Cash Advance - what it means.

* When is MCA the best option for your business?

* Pros and cons of MCA.

* Does your business qualify for an MCA?

* How does MCA work?

* How much does MCA cost?

* Merchant Cash Advance providers - what to look for.

* Alternative funding options.

* Terminology.

Merchant Cash Advance - what it means

Merchant Cash Advance is the perfect short-term source of finance when business funds are needed quickly. Bank loans have a very long approval cycle, loads of paperwork, painstaking credit and background checks, and collaterals - delays you can ill afford when business is not at its best. What's more, you may still not get approved for the loan. MCA providers, on the other hand, have a high approval rate. They do some basic checks and validations, and advance you the cash in minimal time.

MCA is not a loan. It is a purchase. You are selling your future credit card receipts for a lump sum of money paid in advance. The amount of the advance is based on your average monthly credit card sales. You get the money within 7-10 days after an approval cycle of a few hours or 1-2 days. No collaterals. No stress of fixed installments. Minimal paperwork and flexibility.

However, MCA does not come cheaply. The providers are taking a big risk in paying you a large advance which is why they charge high rates - 20%-45% on an average and up to 80% for high risk businesses. In spite of this drawback, MCA is a popular option as it allows businesses to maintain minimum cash flow in good and bad sales days. Moreover, MCA does not impact credit reports as it is recorded as an expense.

When is MCA the best option for your business?

MCA is not suitable for every business and certainly not for long-term financing. Businesses should evaluate their payback potential as they risk overextending themselves if the MCA is not paid off quickly. Typical instances where an MCA is useful are:

* sudden business opportunities

* purchase of inventory

* paying off a debt

* expanding operations

* launching a new store

* renovation

* marketing ventures

MCA is most useful for businesses that:

* cannot obtain a conventional loan at a favorable rate and within the needed timeframe

* cannot obtain a bank loan as they cannot offer a collateral* want a flexible payback structure that allows renegotiation

* need to take credit but do not want it reflected in their credit history

* have a reasonably stable credit card sales volume over the last few months

* expect to increase its credit card sales volume in the coming months

* will be able to repay the loan without finding it too burdensome (repayment amount increases with credit card sales volume)

Though MCA is a viable option for all businesses, it is particularly popular with retail and restaurant businesses that take at least two years to stabilize. This factor makes it tough for them to get approved for bank loans. Seasonal businesses such as pool cleaning services, landscaping firms, and summer camp facilities use MCA to stock up on inventory so they're ready for customers and peak sales.

Pros and cons of MCA

Though MCA provides a timely reprieve to businesses, it has its pros and cons. On the upside, MCA offers the following advantages:

* Quick funding: The advance is transferred to your account in less than 3 days after approval.

* No pressure: As the repayments are percentages of daily credit card sales, the amount fluctuates with sales volume. There is no pressure of fixed installments and timelines.

* High approval rate: MCA providers look at credit histories but are not stringent about it. They invest in the business' future rather than penalizing it for past failures.

* No restrictions: You do not need collaterals nor do you have to pay any application fees, processing fees or the like.

* No impact on credit rating: MCA is not a loan and it does not show up in your credit history, even if you are unable to repay it.

* Potential tax benefit: MCA is written off as a purchase or expense, saving you dollars in tax. Your accountant can advise you on this benefit.

* Minimal risk: MCA is unsecured. If your business fails and you are unable to repay the complete advance, the provider cannot claim your property.

On the downside, MCA has the following restrictions:

* High rates: As MCA is unsecured, providers compensate for the risk with high rates and short terms. Being a largely unregulated industry, there is no restriction on how high the rates can go.

* Short term: Repayment terms are typically 6-8 months.

* Not for all businesses: MCA providers check the longevity of a business and the average credit card sales volume. Home-based businesses and startup companies may not get approved for MCA. Also, the total credit card receipts per month should be at least $3,000 or some fixed minimum.

* Limited advance: The MCA is based on the credit card statements of recent months and may not suffice to cover your immediate finance needs.

* Criticality of consistent performance: MCA providers may send your account to a collection agency if they observe a fall in sales over a period or any other aberration.

* May need you to change your merchant account service: MCA providers need to have access to your merchant account to collect the repayments. If your existing credit card processor does not allow this, you need to switch to another service. You may also be penalized by the merchant account service you curtail.

Does your business qualify for an MCA?

MCA providers have simple guidelines to qualify businesses for the advance. Though the exact prerequisites vary across providers, a business will usually get approved if it:

* is operational since a year or more

* is processing credit cards for at least the last six months (from the time of applying)

* is maintaining a minimum of $3000 (or a minimum set by that MCA provider) in credit card receipts

* is not availing any other MCA

* has reasonable operating costs

* does not have any property liens

* has not declared bankruptcy before

* has one or more years left on a property lease (not mandated by all MCA providers)

* can provide proof of sales and past financial information

* can outline a plan for using the advance (not mandated by all providers)

The better you can convince the MCA provider of the success of your plans, the higher are your chances of approval. Though an unblemished credit history is not necessary to qualify you for an MCA, it can certainly get you better rates and a larger advance.

How does MCA work?

Here's a step-by-step rundown on how MCA works.

1. Contacting an MCA provider

A business owner fills out an online application form on an MCA provider's website or calls them on the phone. The provider asks some basic questions about your business, why you need the advance and how soon.

2. Visit from an MCA company representative

The MCA provider/representative will want to meet you at your office to ensure you work out of a physical office or store.

3. Review of financial documents

During the visit, the MCA provider will ask you for:

* recent credit card statements (spanning 3-6 months) to assess the consistency of your revenue stream

* financial statements

* information on current leases, time left on lease, and debts

* assurance that you have no other MCA transactions

You will fill an application form that permits the MCA provider to pull out your credit report (if required) and check it for bankruptcies, debts, liens or court judgments.

4. Approval

After the preliminaries are verified, the MCA provider will approve your business for an advance amount. Approval takes a few hours or 1-2 days at the most.

5. Calculation of advance and factor rate

Based on the assessment of your financial situation, the MCA provider will calculate a safe retrieval package. This is the maximum amount the provider can deduct from your daily credit card revenue without compromising your business stability. The provider will fix an advance amount, a factor rate (percentage to be collected as the provider's fee for the advance) and a daily retrieval rate (percentage to be collected from your daily credit card revenue).

5. Signing the contract

Once both sides agree to the rates, terms, and conditions, a contract is drawn out. The contract clearly outlines the advance amount, factor rate, retrieval percentage, repayment schedule, and the provider's rights in case you are unable to pay back the advance. Once you sign the dotted line, your advance will be transferred into your account in a week or 10 days.

6. Paying back the advance

The MCA provider will arrange for an automated clearinghouse or credit card processor to hold back a percentage of the daily credit card receipts. Typically, providers test small batches for a few days before transferring the advance into your account. This goes on till the complete advance, with the provider's fee, is paid off.

How much does MCA cost?

MCA providers charge a hefty sum for the risk involved in advancing funds to businesses. The rates can be as high as 45%, going up to 80% for riskier businesses. The amount you need to pay back is determined by the advance amount, provider's fee (factor rate) and the daily retrieval rate.

* Advance amount: is determined by the provider on the basis of your financial stability, time in business, current sales volume, credit history, and similar factors. It can be 80%-125% of your average monthly revenue.

* Factor rate: is the percentage of the advance you need to pay the provider as fee. On an average, this is 20%-45% of the advanced amount but can go up if your business is a risky investment.

* Daily retrieval rate: is the percentage of your daily credit card processing that will go to the MCA provider. This rate ranges from 15% to 25% based on how quickly you want to repay the advance. Providers will calculate the safe retrieval package to ensure you maintain enough cash flow to sustain daily operations.

It works better for your business if you repay the MCA in 6 months or so. However, the repayment timelines are not rigid and can be renegotiated. If your business does very well, the provider can increase the daily retrieval rate so that the advance is paid off sooner. Similarly, if the business is going through a slow patch, the provider may relax the daily rate, leaving you more funds for daily operations.

Merchant Cash Advance providers - what to look for

MCA is an attractive prospect for businesses. Big and small organizations are jumping into the fray to get a piece of the pie. MCA is now offered by banks, small independent organizations, private players, leasing companies, and financial organizations as package deals.

The most important quality in an MCA provider should be its genuine interest in supporting your business. It should take the time to understand your cash flow needs, work with you to fix a comfortable rate that leaves you enough funds to grow your business while paying back the advance. Here are some tips on selecting a good MCA provider:

Experience in the industry

Look for a reputed MCA provider that has worked with many businesses and helped them through financial hardships. Experienced MCA providers work with your business, looking for solutions that are mutually beneficial. Verify the MCA provider's background, experience in your industry, and the clientele.

Transparent communication

The MCA provider should be able to answer all your questions on the application and repayment process knowledgeably. If they estimate that the retrieval percentage will be too high for the advance you want, they should communicate it to you immediately rather than charging exorbitant rates that cripple your business. A straightforward approach is critical in this relationship.

Comprehensive information

Working with an MCA provider may involve some changes at your end. You may need to switch your merchant account service and make business changes to work with lesser cash flow. The MCA provider should apprise you of these possibilities and convince you of the long-term benefits of these temporary adjustments.

Accessible customer service

You will need to contact the MCA provider frequently during the application and repayment process. Customer service should be reliable and accessible whenever you need assistance. If there is a slump in business or things are going well, you would want your provider to rework the existing solution for mutual profit.

Familiarity with your business history

Your bank or credit card processor may also offer MCA. You may get better rates from them as they are familiar with your business history and aware of its credibility.

Market survey

Survey the market for the current MCA rates. However, getting the best rate is not the deciding factor in selecting an MCA provider. Your focus should be on quality and the provider's perception of your business potential. Quality providers will offer reasonable rates that allow you to manage daily operations creditably.

Things reputed providers do not do

Reputed MCA providers do not charge application and processing fees. They do not ask you to switch all your merchant account services to them. They are ready to wait for your decision and don't try to rush you with limited time offers.

The contract

Ethical MCA providers will ensure contracts state the exact rates and terms discussed during negotiations. If there are any discrepancies or additional fees, discuss them with your provider. Study the contract carefully. Understand your obligations and the services that will be rendered by the provider.

Alternative funding options

MCA may not be the best choice for every business situation. Here are some alternative funding options you can use:

Factoring service

A factoring service buys a percentage of your accounts receivables at a discounted price. A lump sum (typically 60%-90% of the billed amount) is paid to you upfront. Though a quick financing option, you should consider its effect on your customer relationships. When you sell your outstanding bills, the financing service takes over the task of collecting them. Some customers, especially longstanding ones, may not be comfortable dealing with a third party agency. This may hurt your business prospects with them. Businesses that have many late paying customers usually find factoring services economical.

Factoring service providers charge a factoring fee to collect on a purchased invoice. This fee is low for creditworthy accounts. Assume you have an outstanding bill of $1000. The factoring service purchases it at 70% with a factoring fee of 15%. It pays you lump sum of $700. Once the provider collects the payment from the customer, she pays you the difference less the factoring fee. That is, she keeps 15% of $300 and pays you $255.

As factoring services only buy specific customer accounts or invoices, you still control a part of your receivables.

Bank loans

If your financing need is not urgent, consider a traditional business loan. It involves detailed documentation, credit and background checks, stringent conditions, collaterals, and a long approval cycle. But the rates are low and payment options flexible. Bank loans are more comfortable for long-term financing.

Equipment lease

If you want finance to procure new equipment, many vendors offer equipment lease. You can pay for the equipment in installments instead of a lump sum.

Avoid advance against credit card limits

Businesses that take a credit card advance against the credit limit of their business or personal credit cards pat high rates and also risk hurting their credit score.


Terms commonly used in the MCA industry are defined below:

Advance amount

The amount an MCA provider advances to a business as a lump sum. It is based on the business' average monthly credit card sales volume and financial stability.

Cash advance provider/MCA provider

Providers that offer MCA to businesses. These could be banks, lease companies, private organizations, and independent players.


A security pledged for the repayment of a loan.

Daily retrieval rate

The percentage of daily credit card sales revenue that is withheld by the MCA provider as repayment of the advance.

Factor rate

The percentage charged by the MCA provider on the advanced amount. This is also called the provider's fee. The business has to pay back the advance amount plus the factor rate.

Merchant Cash Advance (MCA)

A lump sum paid to a business in advance for the purchase of a percentage of future credit card sale receipts.

Monthly credit card sales

The amount of credit card sales processed by a business every month.

Safe retrieval percentage

MCA providers calculate this percentage based on the advance amount and credit card sales volume. It is safe to withhold this percentage of daily credit card sales for repayment of the advance.


This is the division of processed credit card sales between the business owner and the MCA provider. A split of 75/25 means that the business owner receives 75% of the credit card sale amount and 25% goes to the provider.

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