Merchant Cash Advance Myths Debunked

Updated on:
July 10, 2023

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Applying will not affect your credit score

For small business owners, having access to quick, flexible funding can be the difference between growing and stagnating. One option that has garnered both praise and scrutiny is the Merchant Cash Advance (MCA). This financing method is often misunderstood, leading to common misconceptions that can dissuade entrepreneurs from considering it. Here, we debunk some of these common myths and misconceptions and offer a clearer view of the MCA industry.

1. Myth: MCAs Are Just for Businesses with Bad Credit

While it’s true that an MCA provider may not place as much emphasis on credit score as a bank might when deciding on origination, MCAs are not just a fallback for businesses with bad credit. The MCA industry provides a viable financing alternative for any business seeking working capital without the stringent credit history checks typical of loans or lines of credit.

MCA funders often prioritize a business’s daily cash flow and future sales projections over credit score, making MCAs an attractive option for all types of companies, especially those with robust sales but without an established credit history.

2. Myth: MCAs Come with High Hidden Fees

Another common myth is that MCAs come with hidden fees. In reality, MCA providers offer transparency about the costs associated with their products. Unlike business loans, which utilize interest rates and may have a variety of additional charges, MCAs have a simple structure.

A unique feature of the MCA is the factor rate, which is a decimal figure representing the total repayment amount based on the original advance amount. This structure offers small business owners predictability and control over their finances as they understand that repayment* is the agreed upon percent of future sales.

3. Myth: MCAs Drain Your Bank Account

It’s a common fear that an MCA could leave your business strapped for cash. However, the MCA is designed with seasonality and sales fluctuation in mind. The repayment structure is flexible and ties directly to your daily sales, which means you are not burdened with fixed debits to your bank account irrespective of your income. So for example, if the repayment is 10% of daily sales and your revenue is $10,000 then you pay $1,000. But as time goes on, your revenue is only $5,000, then you only pay $500.

4. Myth: The MCA Application Process Is Difficult

There’s a misconception that getting an MCA involves a complicated application process. However, applying for an MCA is often more straightforward than applying for a bank loan, and much faster. Some MCA providers can fund in as little as 24 hours unlike a bank that can take weeks to verify eligibility and provide funding. MCA providers streamline the application process, focusing on your future receivables and cash flow rather than a long list of application criteria. So as long as you can provide 3-4 months of business bank statements, you will be well on your way to getting funded with an MCA.

5. Myth: MCAs Hurt Your Credit Score

In the financial world, it’s common for loans to be linked to your credit score. This is because banks and other lenders usually report your loan details and repayment history to credit bureaus. These details are then factored into your overall credit score, which can be affected positively or negatively depending on your adherence to repayment schedules.

In contrast, Merchant Cash Advance providers operate on a different system. MCA providers primarily focus on the future sales and cash flow of your business to determine eligibility. Their repayment model ties directly to a business’s daily sales rather than fixed monthly payments. Because of this business-focused approach, many MCA providers do not report to credit bureaus.

The ability to maintain your credit standing while securing necessary funding can be a significant advantage for small business owners. For businesses with a less than stellar credit history or for those wanting to keep their credit utilization low, this aspect of MCAs can offer the breathing room they need to focus on their operations and growth. It also presents an opportunity for small businesses to gain necessary funding without the worry of potential negative impacts on their credit score that could limit future financing options.

6. Myth: MCAs Are Only Useful in a Financial Pinch

While MCAs can provide an excellent solution for businesses in need of quick cash, they can also serve as a strategic tool to seize growth opportunities. The flexibility of MCAs allows businesses to leverage them for inventory purchases, expansion projects, or to smooth out cash flow during seasonal business fluctuations.

Conclusion: Demystifying MCAs

Navigating the business financing landscape can be challenging due to the abundance of misinformation. However, by debunking these myths, we hope to have provided a clearer picture of the advantages an MCA can offer.

Remember, every business is unique, and what works for one might not work for another. Understand your business’s specific needs and financial health, and consult with trusted financial advisors before making any funding decisions.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.

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