Your holdback amount will vary depending on the credit card receipts in your merchant account. In other words, when you have a big day with a lot of credit card receipts, your periodic payment (based on the holdback) will be larger than slower days with fewer credit card sales.
Because your periodic payments will likely be daily, you’ll want to confirm whether or not those daily payments will be debited only on business days-or will they also include weekends? And, as mentioned earlier, know whether you’ll have weekly or daily debits so you can control cash flow effectively. Daily debits can be frustrating for a business owner not expecting the first payment to be due so quickly.
The application process is easy and straightforward, but you should be prepared to demonstrate monthly credit card volume of at least $4,500 to $5,000 each month. Because you will likely be required to make a daily (or weekly) direct debit from your merchant account, you’ll want to consider the consistency of your cash flow and whether or not you’ll have the appropriate cash in your merchant account each day to support the periodic payment.
Is a Merchant Cash Advance Right for Your Business?
A merchant cash advance can be a tool to access capital quickly, but it can also put a business in cash flow jeopardy if you’re not careful. Although there are a number of factors that make an MCA attractive to a business with a weak credit profile, and there are many businesses that use this type of https://cashcentralpaydayloans.com/payday-loans-va/ financing to augment a short-term cash flow crunch, a good use for a merchant cash advance is to fund a short-term opportunity to generate additional ROI on a project-like the purchase of quick-turnaround inventory.
The businesses most successful at leveraging an MCA are those that are borrowing to augment some kind of ROI-generating activity, are very mindful of the costs, and understand those costs in relation to the potential ROI gain. If that describes you, a merchant cash advance could be a good option for your business.
How Can I Get Out of My Merchant Cash Advance?
If you opted for an MCA because of a weak credit profile and it becomes apparent that the cash flow burden of servicing the advance becomes a cash flow burden your business can’t support, the only real option is to refinance the obligation with a lower-interest loan of some kind. Unfortunately, if you had a weak credit profile before the MCA, qualifying for a small business loan could still be a challenge.
Applying for another MCA to pay off the first can get expensive really fast and might not be the best way to reduce the obligation of the first. Speaking of multiple MCAs, the practice of stacking MCAs one on top of each other can get expensive really fast and is not refinancing nor is it generally recommended.
The most cost-effective way to refinance a merchant cash advance is with a conventional small business loan. Interest rates are usually much less than a cash advance and often include more favorable terms, if you qualify. Maintaining a personal credit score above 650 (the minimum threshold to apply for a loan with the SBA) and a good business credit history will be required to qualify for a conventional loan. Most traditional banks have a minimum personal credit threshold of 680.
Other options could include asset-based loans. An asset-based loan allows a business owner to capitalize on assets like Accounts Receivables, inventory, or real estate to secure financing. An asset-based loan will be more expensive than a traditional small business loan (though usually less than an MCA), but will be easier to qualify for in a less-than-perfect personal and business credit situation.