Business Loans

Is a Merchant Cash Advance a good option for your business?

Belinda Wan
November 10, 2021

Tap on it: Businesses that have a high volume of credit card transactions monthly can use a Merchant Cash Advance to free up working capital. Photo credit: Unsplash


If you recently applied for an unsecured business loan recently without success, yet have not much collateral on hand to apply for a secured loan, you may want to consider alternative types of loans.

Nope, we don’t mean borrowing from a loanshark or something as drastic, but other ways in which you can increase your working capital.

Some alternatives available to SMEs include invoice financing and factoring, and business overdrafts. Now let’s add another to the mix – the Merchant Cash Advance (MCA).


How does a MCA work?

A MCA is a type of financing solution that can be used by SMEs that have a high volume of credit card transactions monthly, such as retail or F&B businesses, to free up working capital, make inventory purchases, or settle unexpected payments.

This entails such SMEs selling the lender a percentage of their future credit card and debit card sales in return for an advance that is usually given in a lump sum. This percentage is typically drawn from the business’s bank account at the end of every month.

A MCA is often used as a stop-gap measure to solve urgent working capital needs, and is not intended to be used as a long-term solution.

Sometimes, a MCA is also known as a revenue advance (RA). This is not a loan, but a lump sum that is advanced to you based on a projection of your future revenue. By selling a percentage of this revenue, you get to unlock working capital when the advance is given to you.

If you are thinking of applying for a MCA, a lender will evaluate your eligibility based on the volume of credit card transactions on your credit card terminals over the last six months.

In most instances (though not all) , an SME may not have very good financials, yet may have enough transactions made on its credit card terminals over a six-month period for the financials to take a back seat during the application process.

However, if you request for a higher-than-expected amount, the lender is likely to take a closer look at your profitability and financials, after which a guarantor may be required.


The factor rate

Once your MCA application is approved, the financier calculates the loan quantum by determining the amount of the advance to give you, multiplied by the factor rate.

This factor rate, which is determined by the financier, depends on a few factors such as: your credit card statements (to see how solid your credit card sales are), bank statements of your business (to check if your company is financially healthy), years in business (you need at least two years) and your business tax return (to track how your company does over the course of a year).

The factor rate can range from 1.1 to 1.5, though some lenders charge factor rates as high as 3 or 4. So to figure out how much you need to repay for a $10,000 advance, you would take $10,000 x 1.5 (the factor rate) = $15,000 for a 12-month term.

In other words, you are paying $5,000 just to get the $10,000 advance. This means a 50% interest rate for the $10,000 advance given.

Another caveat – with a factor rate, all the interest is charged to the principal where the advance came from. This is different from using an Annual Percentage Rate (APR) method of calculating interest, where the interest calculated on the principal amount gets smaller and smaller as more of the loan is paid off.

Basically, what this means is that the MCA is a short-term loan option, but a rather expensive one. So you should only use it if you absolutely have to.


How the MCA works

The advance will be disbursed to you in full at the start. Both you and the lender need to agree on the percentage of the card transactions that will be remitted to the lender.

Even as this percentage of the transactions is sent to the lender when the card transactions are paid for, you can continue accepting credit or debit card transactions from your customers like you normally would.

Depending on how much your loan quantum is, the repayment is usually made over a period of six to nine months, and often no longer than a year.

In some instances, the financier may open a bank account with the SME and direct all credit card transactions to this account, from which repayments will be deducted every month.

For this arrangement, it depends on the value of your credit card transactions at the end of the month. If they end up being more than the amount to be repaid at the end of the month, the financier will return the excess to you.

If the monthly credit card transactions are less than the repayment amount, the repayment period may be extended by a month. Additional fees may also be charged.


Pros and cons

Let’s start with the pros first.

The biggest plus point of a MCA is the speed at which it is approved – a few weeks – as compared to a business loan, which could take months.

Depending on what you agreed on with the financier, your repayment terms may allow for some flexibility.

The amount you pay also changes according to what you are able to earn for the month, which minimizes the risk of you being caught unawares and having to pay more than you expected.

Unless you are requesting for a sizeable advance from the financier, you may be able to get away with not doing a credit check.

If the amount you are requesting is fairly small, you may get approval from the financier even if your credit score is less than perfect. Lastly, you don’t need to have any fixed assets or collateral to apply for a MCA.

And now come the cons.

The first and most obvious minus point is that a MCA is expensive. In fact, if you sit down to do the math, it may be less worthwhile to get a MCA as compared to a short-term business loan.

Making repayments more quickly won’t help either, since the factor rate applies to whatever you manage to earn – no matter how early you pay.

More importantly, a MCA is by no means a long-term solution and should be used for short-term but urgent needs only. You may run into difficulty in making repayment if your business performance slumps and you end up earning less than expected.


How to apply for a MCA

The eligibility criteria may differ for various lenders, but most of them require that your company be at least two years old, and registered with an accredited payment provider for at least six months. The credit history of your business will also be taken into account.  

You should also be running a reputable business, with at least 30% of the company owned by Singaporeans or permanent residents.

If you are thinking of getting a MCA or RA, but don’t know where to start, we’ve worked out a few options for you.

Jenfi works on a new model of repayment that involves a percentage of your revenue so you can get funding for your marketing and inventory spend on your own terms.

For revenue-based financing, check out Choco Up, a financing platform that provides startups with non-dilutive funding and a flexible repayment schedule. 

If you are keen to explore similar solutions, private lender Zetl specializes in invoice financing, as well as payroll financing and credit lines.

All three lenders accept repayment based on future revenue.


Conclusion

It is best to consider the pros and cons of a MCA, as well as its limitations, before applying for one.

Alternatively, you can opt for invoice financing or factoring, or a short-term unsecured business loan.

Get started by checking your loan eligibility for free. If you have assets such as property, you can consider applying for a secured loan after getting a free property valuation here.

Or register on Lendingpot to reach 45 financial institutions with just one online application – for free.


Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.


That loan is out there

Register and apply on our digital business loan marketplace and instantly connect with 45 financial institutions for free!


Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.

About the author

Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.

MCA
Merchant Cash Advance
Pros and Cons
Financing Solution
SMEs
business

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