There have been a couple of changes in the domain of business lending and small businesses are taking advantage of this. The biggest of those changes being the rising popularity of alternative forms of funding that do not carry the same restrictions as more traditional forms. At one time a small business’s qualification of being approved for a loan was based on metrics and a diverse set of automated technologies. As of now, we’re seeing a rising popularity in Marketplace lenders, Crowdfunding and of course Merchant Cash Advances or MCA’s.
MCA’s are the purchase of future credit card processing receivables that allow the lenders to receive payment through the credit sales of the business that’s borrowing. They have much more flexible financing terms, don’t have fixed rates and require a lot less paperwork than traditional methods of financing. This is often an attractive alternative for business owners because the process typically takes less time and don’t require you to hold your personal assets as collateral. There are currently two forms of MCA’s which are traditional MCA’s and Bank only ACH’s.
Traditional MCA’s: This type of MCA takes the historical receivables of the funder into account before underwriting future credit card receivables. A small percentage of credit sales are taken as payment usually over the course of a year which is why businesses that rely on credit sales value it so much. It does not require much effort on the part of the lendee as the deduction is made on a daily basis and does not follow a amortization schedule or fixed maturity.
Bank Only ACH: This type of MCA on the other hand does not require the credit card cash flow information but the overall revenue as a whole. What happens is that the cash sales are ACH debit for a certain percentage if the amount is 0ver $1.2 million.
MCA’s are typically repaid in three ways.
Split withholding: Through this method credit cards sales are split between the business and the finance company automatically based off of the agreed upon portion. This is the most popular method of repayment used as it is the smoothest.
Lock box or trust bank account withholding: In this method all of the business’s credit card sales are are put into a bank account controlled by the finance company and afterwards arrangements are made to notify the borrower of the agreed upon portion through EFT, ACH or wire. This usually the least favored alternative.
ACH withholding: Finance companies can deduct portions of the amount owed from the borrower’s checking account after they’ve received the credit card processing information through ACH.
MCA’s requires no third party involvement and when you send your historical credit card or ledger sales data and you can get an advance within the same day. For these reasons alone MCA’s are growing in popularity and are proving to be great lending alternatives for businesses with a less than perfect credit history. Through technological innovations being done new doors are opening for MCA’s as it makes its move to new online platforms creating new opportunities for small businesses now.