A quick mca loan process that offers same day merchant cash advances for business owners.
Last Updated on August 14, 2024
Shield Funding TeamA merchant cash advance is a financing product available to help meet the capital needs of small and medium sized business owners. According to the Federal Reserve in a 2024 survey, 8% of small businesses sought out merchant cash advances, with an approval rate of 82%. Although the approval rate is high and the ease of funding make MCAs look appealing, it is not right for every client or business.
Shield Funding has been helping businesses grow for two decades by providing very competitive rates and terms on merchant cash advances. After two decades we are confident we can offer the best programs available in the industry. Below we provide background on this financial product as well as alternatives that may be a better fit. Feel free to contact us at anytime if you have questions or apply online and get funded as fast as the same day.
Requirements
MCA Features
Work with a direct lender and get a merchant cash advance as fast as the same day. Shield Funding offers competitive rates and terms on all it’s funding programs. Apply now with a trusted lender that has been helping business owners secure working capital for almost two decades.
1. Small Business Administration (SBA) Loans
These are low-cost, government-backed loans provided by the Small Business Administration through approved lenders, such as qualifying major banks. They cater to a variety of needs, including real estate, operations in underserved communities, or service member businesses. Applicants typically need a credit score over 600, and the approval process can be lengthy. However, every business owner should have tried this option when pursuing business funding options.
2. Lines of Credit:
Similar to a credit card, a business line of credit offers flexible borrowing up to an approved limit. Interest is charged only on the amount drawn. It requires good credit and extensive documentation, and approval may take several weeks.
3. Equipment Loans:
Targeted for purchasing business equipment, these loans use the equipment as collateral, often resulting in lower interest rates. They are beneficial for acquiring essential business equipment.
4. Invoice Factoring or Financing:
This involves converting accounts receivable into immediate cash. Invoice factoring means selling the invoices to a lender who then handles collections (possibly alienating customers), while financing allows the business to retain control over collections. It helps manage cash flow but requires evaluating customer creditworthiness.
5. Business Term Loan:
A traditional term loan from a bank is the most common type of business funding and should be your first stop next to the SBa if you are considering financing. You can receive a loan for 2 to 7 years with monthly payments. The current rates are approximately 15% or more at most national banks as they rely on the prime rate plus formula which is currently at 8.5% for 2024. This type of funding is ideal for almost any type of business expense including longer term financing projects as there are almost no cheaper borrowing options outside of friends and family. It is important to note that the approval process is several months, you generally need a relationship with the bank, you need at least 2 years in business, and there are extensive documentation and excellent credit requirements.
6. Personal Loans:
Personal loans are taken out by business owners, using their personal credit and potentially risking personal assets. They provide capital for rates between 15%-40% with term sup to 5 years but can endanger your personal finances/assets if there is a default.
7. Business Credit Cards:
Business credit cards offer a revolving line of credit with options for cash advances at high-interest rates that approach 40% in today’s high interest rate environment. They are suitable for managing periodic cash flow issues or for accruing rewards on business purchases but have higher interest rates and lower credit limits compared to other loans.
A merchant cash advance or MCA, also known as a business cash advance, is when a borrower sells a percentage of future sales at a slight discount to a lender for an upfront cash advance. You are pledging to repay the advance out of your future sales, and the lender gets paid back as you generate revenue in your business.
Years ago MCA’s were only structured for a business that processed credit cards, and the payments were automatically deducted via the credit card processing company as each sale was generated. Today however, MCA’s are also offered to companies that do not process credit cards as well. The MCA is structured with the payback as a percentage of sales where a daily or weekly payment is automatically deducted from the business bank account. Both options are available and the lender and the borrower agree before the contract is established as to what the percentage of sales will be, it is usually a very small percentage and that is how the payment amount is established.
It is important to point out for that a merchant cash advance is not a small business loan. You are selling future sales through a contract with your lender. So for tax purposes, and state laws & regulations, it is not treated as a business loan, although there are possibilities for deducting the fees associated with the advance. However, all those options should be discussed with an accountant or CPA, or financial advisor.
A merchant cash advance is set up as a purchase of sales, so the business owner must have existing sales revenue before applying. The lender looks at your past few month’s sales to predict your upcoming month’s sales receipts. Then, they’ll advance you a sum based on those predictions. Here are the basic steps of the process:
The business owner applies for an MCA through a lender like Shield Funding, usually online with a short application. The lender will then typically ask for a bit more information and paperwork to verify the business’s sales, cash flow, and ownership. The general requirement is to provide four of the businesses’ recent bank statements, as well as some basic ownership verification and ID.
If the business is approved, the lender provides the business owner with a lump sum of cash, usually within a few days or sometimes even the same day depending on how quick the communication transpires.
Instead of making fixed monthly payments like in a traditional loan, the business repays the MCA through a small percentage of its business sales in the form of a daily or weekly payment. This is all agreed upon in advance between the business and the lender.
The repayment process is automated, meaning the lender deducts the payment via the business bank account via ACH until the advance and any lender fees are fully repaid. This means that the repayment amount may fluctuate based on the business’s daily sales, but the estimates are usually very accurate to determine the daily or weekly payment.
Once the business has repaid the advance, including the fee charged by the lender, the MCA is considered fully repaid. The customer then can request another advance or move on without any additional business funding.
The cost for a merchant cash advance depends on the factor rate and length of time you receive the advance. There is no “interest” on an MCA, instead a fee is applied above for taking the loan amount, and that fee is added to the principal to determine the pay back.
An example merchant cash advance would be for a client to receive $100,000 in funding for 12 months at a factor rate of 1.30 (represents 30 percent). That would make the additional cost (or fee) above the advance amount $30,000, so your total pay back amount would be $130,000. An example payment would be $500 a day, Monday through Friday, no weekend payments for a 12 month period of time. This funding scenario is easy to understand because the pay back is 1 year. However, MCAs can easily become a higher interest rate product as you reduce the time for pay back.
Let’s say you only have 6 months to pay back the same MCA. To compare the cost of the 6 month merchant cash advance to other financial products the easiest calculation is using an annualized percentage rate. It is not the true APR because that would require the inclusion of compounding interest and daily payments, but it does offer an easy to understand and compare percentage to compare other financial products.
To calculate the total repayment amount you multiply the borrowed principal amount of the MCA by the factor rate: $100,000 (MCA amount) x 1.3 (factor rate) = $130,000
To calculate the total cost percentage you divide the fee above the principal ($30,000) by the contracted loan amount: $30,000/$100,000 = .30 or 30%
To calculate the annual rate we take the cost percentage (factor rate as a decimal) and divide it by days in a year: 0.30 x 365 = 109.5
(Annualized Interest Rate) = To calculate the interest rate we divide the annual rate by actual days in the contract: 109.5/180 = 0.6083 or 60.83%
Calculating the annual interest rate for a loan with a fixed payment amount is a helpful tool for general comparisons, but calculating the true APR for a product like an MCA, where the balance decreases with each daily payment, requires a more complex calculation. For more information on rates and drilling down on APR for comparing financial products see the true costs of a merchant cash advance.
MCA providers generally request their repayment via a “holdback percentage”. This is the percent of sales revenue that will be “held back” and sent to the lender via ach. MCA providers commonly charge holdbacks of 10% to 15% depending on your gross monthly sales. In the case of a $100,000 advance at a 1.3 factor rate ($130,000 total payback), your company would likely be generating 100k a month in sales. An 11 percent hold back would result in an approximate payment of $500 a day or $2500 a week, depending on which repayment option works with your cash flow.
Because monthly revenues are never exact, there is the possibility that there could be minor adjustments up or down on payments along the way. The hold back is based on projections and after years of learning with prior business activity the payment amount is generally established to be in a close proximity to the average revenue of the borrowing business over the time frame of the advance.
Merchant cash advance approval amounts depend on your monthly sales revenue and overall business bank deposits and cash flow. Approval amounts for this funding option can range as high as 100% or more of your monthly processing amounts. As an example, if your business currently has monthly gross receipts of $50,000, you can possibly get approved for 50k or more. This is a general guideline but can vary depending on the type of business you have and your credit profile.
Many of our clients come to us after having a merchant cash advance out with another company. Some reasons why they have come are: the rates or payments for their merchant cash advance were too high; the funding amount wasn’t enough; they required additional funding; there were just too many add-on fees and they didn’t want to overpay for their next advance; or they were just not happy with the level of service. Shield Funding can pay off your existing advance and get you a better program that is less expensive, provides more funding, is not inundated with additional fees, and meets your expectations on every level. We also offer options for merchant cash advance consolidation for individuals that have multiple advances and want only one payment.
Many clients come to us looking for an alternative to traditional business loans because they have poor credit or they just don’t meet the basic credit requirements from a bank. Our merchant cash advance is a great business funding solution for business owners that are looking for a bad credit business loan. Getting funded is based off of business revenues and not just credit history alone which makes it great for individuals with lower credit scores. If you have been denied a business loan because of bad credit or you fail to meet traditional financing credit requirements our merchant cash advance program can be a great alternative.
Your credit history is not the dominant contributing factor in the approval process, however, a better payment history contributes to higher approvals at better terms as with any credit and lending. What is more important than credit history is the actual financial health of the business. With most applications, we look at 4 months of the most recent business bank statements and here is a list of items that we analyze:
This is a general idea of what most lenders will look at in the merchant cash advance industry, although each and every lender may have their own requirments.
Documents Required for Less Than $100,000
Potential Docs for More Than $500,000
There are pluses and minuses to any lending product. Although merchant cash advances are good for many business owners, they are not right for everybody. Smart borrowers should review both carefully before making a borrowing decision.
They’re quick and easy. When a small business owner needs cash in a hurry, a MCA is a great option. Instead of waiting weeks or months to receive approval on a bank loan, you can get an MCA in a few days. Lenders examine your business’s daily credit card receipts, evaluating them for cyclical patterns and trends, when deciding how much money to advance. Because they require less documentation to approve lending than a bank loan, they fund faster.
Physical collateral isn’t required. A bank loan or other form of financing might require you to pledge business assets to secure the loan – which means you risk losing them if you can’t afford to repay. MCAs are unsecured – which means the lender doesn’t require physical collateral. Instead, the MCA provider will likely require a personal guarantee. A personal guarantee is a written agreement where your signature indicates agreement to be held personally responsible for repaying the advance. With this agreement, the MCA provider can recoup any losses in the event that you can’t pay.
Sales and payments align. With a traditional loan, you owe a monthly lump sum payment regardless of your cash flows. Since a MCA is repaid from credit card sales, repayments match how well your business is doing. During a slow week or month, you’re not stuck scrambling to cover a large loan payment.
You choose how to use the funds. If you take out an equipment financing loan, you have to buy a piece of equipment with the funds. Other loans require that you maintain certain Balance Sheet ratios or restrict the funds’ use, which means that you’re inviting another party into how your business is run. With a MCA, issuers place few stipulations on how the cash is to be used. Many small business owners prefer this freedom.
Borrowers with poor credit can get funding. It can often be difficult for a small business owner with poor credit to access funding. But since lenders extend a merchant cash advance on the basis of credit card sales, a personal or business credit score is less important. MCAs are one of the most accessible forms of credit if you have a low credit score.
Your APR could be very high. If you could easily calculate the APR on an MCA, you’d find that it typically ranges from about 40% to 120%.
Merchant cash advances are far more expensive than traditional bank loans and several other borrowing products whose APRs are typically 10%-15%, although rising in 2023 because of the current banking crisis stemming from Silicon Valley. Other borrowing options are also rising like business credit cards, with APRs from 15% to 40% recently, or online small-business loans, with APRs from 20% to 99%.
Higher sales lead to a higher APR., you repay the MCA faster — and, subsequently, APR goes up.
There’s no benefit to repaying early. With a factor rate, you pay a fixed amount of fees on top of the advance, so there’s no way to save on interest with a MCA. When you’re repaying a traditional “amortizing” small-business loan, early repayment results in less interest paid.
You can fall into a debt-cycle. The speed of funding and easy approval of MCAs can trap you in a debt cycle if you’re not careful – especially if you don’t qualify for other types of financing. The extremely high cost and frequency of repayments for the first MCA could cause cash flow problems, leading to a borrower needing to take out another advance shortly after they borrowed the first MCA. A daily payment of hundreds or thousands of dollars, for example, could put a strain on your cash flow and put you at risk of default.
There’s not a lot of federal oversight. Because MCAs are not structured as loans, but as commercial transactions, the industry isn’t subject to federal regulation. They aren’t considered banking transactions so they’re regulated by each state’s Uniform Commercial Code in each state. This has led to some unscrupulous lenders and many people to question are MCAs predatory. It is for this very reason that we take every step to secure the satisfaction of all our clients and our reviews and 20 year reputation speaks for itself.
Contracts can be confusing. Even if you take the time to read the contract, they’re often loaded with unfamiliar terms (which we define below). Also, most MCA lenders do not provide APRs, so it’s hard to compare them with other financing products. We do however show you a way to calculate your apr on an MCA.
Possible Guarantees. Some lenders may also require signing a legal document called a confession of judgment as part of the advance paperwork. If the company takes you to court, signing that confession of judgement may forfeit your right to defend yourself, although most states are now disallowing this.
MCAs can be too expensive for their intended use. While an MCA can be a great way to help your business through a slump, they’re not meant to fund large, long-term projects. If you’re planning an expansion or new investment, you have the time to shop around and get approved for a business loan.
To explore a detailed list please check out the pros and cons of merchant cash advances.
A merchant cash advance can be a good choice for your business, despite their cost, if you use the funds wisely. The best uses for an MCA usually spring from temporary, unexpected cash needs that fit well with the short MCA funding time frame. Below is a short list of the more common uses but for a more extensive list check out the best uses for mca’s.
1. Help with temporary cash flow problems.
2. Purchasing inventory that you can quickly resell at deep discount.
3. Placing a large inventory order to fulfill contracts.
4. Unplanned expenses.
5. Paying other debts to avoid default.
6. Cover working capital needs.
7. Profitable opportunity arises.
This is a very common question because many business owners are taking on debt to grow their business. There are a variety of things to consider as each individual case is different, but two things in particular are very important and should be considered.
First, is budgeting for your payments. Do you have the available cash flow for current and future payments. Second, is the reason you are taking on debt justifiable. It is important that you account for ROI or your return on investment. It does not make sense to take on debt that is more expensive than the profit opportunity.
Short term ROI is easy to calculate with the following formula: your return on the investment (%) = net profit/total investment cost, and then multiply by 100. So as an example, if you have an advance of $50,000 for a year with a 20 percent fee your total cost is $60,000. If this investment in your business makes $10,000 more a month (12 x $10,000=$120,000), after a year your net profit would be ($120,000 – $60,000=$60,000). Now figure out your ROI as $60,000 (net profit) / $60,000 (investment cost) which equals 1 and then multiply that by 100 (1 x 100). This would make your ROI in this scenario a 100% return on your investment.
If you want to read more on whether this type of business funding is a good fit explore this helpful article about whether or not a merchant cash advance is right for you.
Here are definitions for some of the confusing terms you might find in a MCA:
A. Factor rate – the rate you’re paying to borrow the money.
B. Specified percentage, holdback, or retrieval rate – this is the percent held back daily from sale to repay the advance.
C. Purchase price or advance amount – the amount you receive, or your advance from the lender.
D. Receipts purchased amount – total payback amount, or the future credit card receipts you’ve sold to the lender.
If you decide that a MCA is right for your business, you must manage it as you would any type of debt.
Include your best estimate of daily or weekly repayments in your cash flow projections and budgets. Make sure you save and keep enough cash on hand to cover payments, particularly if you chose the ACH withdrawal repayment method. Don’t budget credit card sales to go elsewhere when the lender will be holding them back.
If you’re repaying the advance from a bank account, make sure you always have the funds available to cover the ACH withdrawal. Bouncing a payment is similar to bouncing a check or credit card payment.
It’s also a good idea to wait to take out another MCA until you’ve paid off the first one. You can receive better rates from a lender once you’ve proven your ability to repay an advance and built up a relationship with them. This also prevents you from falling into a debt cycle.
What happens if you do not pay back a MCA? Most providers include a personal guarantee in their contract so that they can come after your personal and business assets. They could place liens against your personal residence or vehicles, buildings used for business purposes, or other assets. It is always advised to contact the lender if you are having problems before going into default.
MCA’s don’t report your on-time payments to credit bureaus, but they do report defaults. If you have a default on your credit history, it will make it harder to get financing in the future.
Only you can decide if a merchant cash advance makes sense for your business. Examine the pros and cons list against your situation, look at how the factor rate will impact your cash flows, and talk to a lender if you need more information.
We are the first ones to say that a bank should always be your first stop when trying to secure money for your business. A merchant cash advance is for clients that have reasons to not go the traditional financing route, such as bad credit, cannot wait for the bank approval process, or just an immediate opportunity or similar.
There are a variety of ways someone can fund a business endeavor. The important point is that funding your business should be well thought out. For some people, a financial planner or accountant can be a good option to consult with before making a decision. And just as you are considering a merchant cash advance, you should also explore the best alternatives to an MCA loan. Shield funding wants you to be aware of all of your possible business funding options so here are some alternatives:
This type of business funding has low document requirements so you can receive funding possibly in the same day you apply.
This type of alternative funding is very flexible, clients have been funded with a 500 FICO score.
A minimum of two months in business is required, but in most cases you should be in business for at least 6 months.
