Understanding Merchant Cash Advance Loans: From Application to Repayment
The popularity of merchant cash advance loans among UK businesses is at an all-time high. Not that this is difficult to understand when you consider the unique benefits MCAs can offer SMEs:
1. Fast Access to Funds: MCAs can enable businesses to access essential funds within hours. This speed is invaluable when addressing urgent financial needs or taking advantage of time-critical investment opportunities.
2. No Collateral Required: Unlike traditional loans that often require collateral, MCAs are unsecured, meaning that business owners do not have to risk their assets to secure funding.
3. Flexible Repayment: MCA repayments are tied to credit card sales, making them suitable for businesses with fluctuating revenue.
4. Simple Application: The application process for a Merchant Cash Advance is straightforward, involving minimal documentation and verification.
5. Approval Rate: MCA loans have a higher approval rate than traditional bank loans, even for applicants with imperfect credit ratings.
But as is the case with all types of commercial funding solutions, it is vital to build an understanding of exactly how MCAs work, before submitting an application.
Merchant Cash Advance Loans: A Practical Example
Perhaps the simplest way to get to grips with the mechanics of MCAs is to consider a figurative case study. In this case, a small retail business in London faced a cash flow crunch during a slow season.
After considering various financing options to restock inventory and cover operating expenses, they decided to go with an MCA.
1. Choosing MCAs Over Other Financing Options
The company weighed up the pros and cons of MCA loans against traditional loans and other commercial finance options. Their decision was based on factors such as the urgency of their funding needs, the simplicity of the application process and the flexible repayment structure that suited their seasonal business.
2. Applying for the MCA Loan
The first step in securing an MCA loan is finding a reputable provider. The company selected a provider with the help of an independent broker, in order to ensure they got the best and most suitable deal. The application process involved providing basic business information, recent bank statements, credit card sales history, and evidence of at least six months in business and verification of no outstanding bankruptcies.
3. Receiving the MCA Loan
Once approved, the MCA provider transferred the funds directly into the company’s business bank account. In this case, they received £20,000, which was based on their average monthly credit card sales.
4. Understanding Fees and Charges
MCA loans differ from traditional loans in terms of how costs are structured. Instead of an interest rate, MCAs charge a factor rate, typically ranging from 1.2 to 1.5. In their case, the factor rate was 1.3.
The total repayment amount can be calculated as follows: Total Repayment Amount = Funded Amount × Factor Rate
For this company mentioned: Total Repayment Amount = £20,000 × 1.3 = £26,000
This means that they would repay a total of £26,000, including fees and charges.
5. Repayment Process
MCA loan repayments are tied to credit card sales. A percentage of each day’s credit card sales are automatically deducted by the MCA provider, until the total repayment amount is reached.
For the company in question, with daily credit card sales averaging £1,000, their MCA provider deducted 10% of daily sales towards repayment. Therefore, if they had a daily credit card sale of £1,000, the provider would deduct £100 and the repayment period would depend on their daily sales.
The process then continues until the facility is repaid in full, at which point the agreement comes to an end, or they can submit a new application for further funding.
For more information on the potential benefits of MCAs or to discuss the suitability of an MCA for your requirements, contact a member of the team at Rosewood Finance today.
