How to choose a merchant cash advance company
If you are looking for a merchant cash advance, you should research and vet several companies before deciding which one is right for your business.
Some merchant cash advance companies have been criticized for confusing contracts and misleading sales tactics, leaving businesses falling victim to predatory lenders and cycles of costly debt that are difficult to break. There is.
Although some states have taken legal action in recent years to require transparency from MCA companies, bad actors still take advantage of business owners with promises like “guaranteed approval” and “no credit check business loans.” Trying to.
Not all merchant cash advance companies are predatory, but it's still important to be aware of red flags and look elsewhere if an offer doesn't seem right.
When comparing MCA providers, consider the following factors:
Financing possibilities
The maximum loan amount varies depending on the merchant cash advance company. You need to make sure that the provider's requirements match what you are looking for. Some MCA companies also offer other types of financing. If you think you might qualify for other options, consider them as well.
Borrowing costs
MCA companies charge their fees as a factor rate, rather than an annual percentage or simple interest. Factor rates can make it more difficult to understand your borrowing costs, so you'll need to convert these rates to APR. This can be done using the MCA calculator. Ask the merchant's cash advance company if there are any additional fees and include them in his APR calculations as well.
Repayment options
Some providers will automatically apply a percentage of your debit or credit card sales toward repayments, while others will automatically debit your business bank account. Additionally, some companies require daily or weekly repayments, while others allow you to choose what works best for your business.
Eligibility requirements
Compared to traditional small business lenders, merchant cash advance companies typically have flexible eligibility requirements. These companies consider your personal credit score, business hours, and annual revenue, but are often willing to work with startups and businesses facing credit issues.
Additionally, many companies prioritize debit and credit card sales and monthly banking activity when accepting applications, as the proceeds will be used to repay advances. The stronger your credentials, the lower the factor rate you will receive when financing.
Speed and application process
Most MCA companies offer simple applications with minimal documentation. You can usually apply and receive your funds within a few business days. Some providers offer a dedicated account manager to guide you through the process. This is useful if you want a more personalized experience.
Transparency and lender reputation
Look for merchant cash advance companies that are upfront about their products and how they work. Ideally, the company offers multiple ways to contact customer service and get honest answers to your questions.
If you receive an MCA contract from your provider, the terms, fees, and repayment information should be clearly stated. In addition to speaking with merchants, reading reviews and contacting other business owners can help confirm the merchant cash advance company's reputation and trustworthiness.
confession of judgment
Many MCA companies require or require you to sign a confession of judgment at closing. This is an agreement that allows the MCA company to enter a judgment against you in court without informing you. If possible, check whether your MCA company requires this document before proceeding with your application. If that is a requirement, that alone may be reason to look elsewhere.
Alternatives to cash advance companies for merchants
Besides merchant cash advances, it's worth considering other options, including:
online lender
If you need money quickly or are having trouble qualifying for a loan due to credit issues, term loans offered by online lenders may be a better option than MCAs. there is. These short-term loans have a set repayment period and may require frequent payments, but they do not come directly from debit or credit card sales.
These loans have lower total costs than MCAs, and many lenders have reasonable credit score and tenure requirements.
business credit line
If your primary need is revolving funds, you may want to consider a business line of credit before applying for an MCA. With a business line of credit, you only pay interest on the funds you use, similar to a credit card.
A business line of credit can help you cover your working capital needs without having to pay directly from your sales daily or weekly like with an MCA. For example, online lenders Headway Capital and Fundbox both offer lines of credit with flexible eligibility requirements.
invoice factoring
Business-to-business businesses that are having trouble qualifying for other financing options may consider invoice factoring.
Invoice factoring allows you to sell your unpaid invoices to a factoring company at a discounted price. You receive a cash advance (up to 90% of the invoice amount) and the factoring company is responsible for collecting repayments from the customer. Once the customer completes the payment, the factoring company will send you the difference minus the agreed upon fee.
Factoring companies prioritize invoice value and customer creditworthiness when evaluating applications, so even if you're a new business or have poor credit, invoice factoring can be easier to qualify for than traditional loan options. can.
Small business subsidies
If your business is growing and you have time to plan ahead for financing, consider looking for small business grants. Unlike store cash advances and other types of debt financing, business grants are a free source of funds that don't need to be repaid.
These grants may come from the federal government, local governments, large corporations, or local initiatives. These can be used to start a business in times of economic hardship or to fund businesses in underserved markets, such as women-owned and minority-owned businesses. can.
find the right business loan
The best business loans are generally those with the lowest interest rates and the most ideal terms. However, other factors, such as time to funding and business qualifications, will help determine which option you choose. NerdWallet encourages you to compare small business loans to find the best fit for your business.
