Merchant Cash Advance: the solution to your capital needs?

What is Merchant Cash Advance?

Merchant cash advance, or MCA, is a financing solution designed to meet the capital needs of small businesses.

This type of financing , which could literally be translated into French as "advance on revenue", refers to the process by which a lender advances a sum of money to a company that will be reimbursed via a percentage of the company's future sales.

It is thus an alternative to commercial loan as the requirements of commercial lessors are higher. 

The loan approval process, which often involves the review of various elements such as cash flow, is a very complex process. cash flowtax returns or your credit rating, is much longer.

In contrast, under the MCA, lenders are primarily interested in your credit card sales (which are the sales on which the percentage to repay the MCA is applied). 

In terms of repayment terms, the MCA has no fixed monthly payments or interest rate.

In addition, merchant cash advance differs from a commercial loan in its very purpose: whereas the repayment period of a commercial loan can be spread over 25 years, the MCA is designed to meet short-term financing needs. Thus, most of these cash advances are repaid in less than a year.

In light of these differences, merchant cash advance is not considered a type of commercial loan.

Traditional lenders do not offer this type of financing. You will have to turn to specialized MCA companies whose services are usually available online. 

5 million, which makes them particularly attractive for start-ups and young companies.

Overview of how Merchant Cash Advance works

As mentioned earlier, the Merchant Cash Advance is an advance of funds from a lender to a business based on the future credit card sales of that business. In practical terms, this means that a percentage of the credit card sales will go to the lender.

To obtain a Merchant Cash Advance, the company must first apply to a financial institution or service provider that specializes in MCA.

This request is accompanied by information such as sales for the last few months, which will serve as the basis for the study of the company's eligibility.

If the company is declared eligible, it will receive an offer including the terms of repayment, details of the amount advanced and the interest rate retained. 

Typically lenders will advance between 50% and 250% of the monthly credit card sales volume and the percentage applied will vary between 5% and 20% depending on the total advance amount.

In this regard, it should be noted that Merchant Cash Advances aregenerally more expensive than traditional commercial loans due to higher interest rates and transaction costs.

However, they remain attractive financing options for businesses that need funds quickly and have difficulty obtaining a conventional bank loan due to their limited credit or financial situation.

In terms of repayment terms, two types of repayment are identified. The first is to receive a cash advance in exchange for a percentage of credit card sales.

The second is to repay the advance received, not directly from the sales made, but by regular and fixed deductions from your bank account. This is an alternative, especially for companies that do not have a large volume of credit card sales.

The various advantages of Merchant Cash Advance

First, Merchant Cash Advance provides rapid financing for short-term capital needs. The approval process for the cash advance can be reduced to a few days versus the weeks (or even months) required to approve a commercial loan.

In this respect, the eligibility criteria are not as high as for bank loans. Companies in difficult financial situations or with a low credit score can obtain an MCA. 

This is especially true for start-ups , which may have difficulty obtaining financing from traditional institutions.

In addition, this arrangement is very flexible. First of all, the repayments of the cash advance are made according to the volume of your credit card sales and not through fixed interest rates. 

This flexibility is particularly welcome in sectors of activity characterized by irregular income, such as tourism or trade.

In addition, unlike loans that are intended for specific financing (the purchase of equipment, for example), the MCA brings a great deal of freedom to businesses since lenders impose few conditions on the use of the funds, which appeals to a large number of entrepreneurs.

Finally, compared to commercial loans, MCAs do not require collateral . Indeed, where banking institutions require pledging of assets to secure the loan, MCAs do not require such collateral.

However, lenders may require a personal guarantee holding the company representative personally liable for repayment of the advance. This will allow the lender to cover its losses in the event of the company's insolvency.

How can Merchant Cash Advance take the form of Revenue Based Financing?

As a reminder, the Revenue Based Financingor RBF, is a non-dilutive financing (which preserves intact the shareholding and therefore the control of the company) that allows companies to raise funds in exchange for a percentage of their future revenues.

In this respect, it has many advantages. Firstly, this tool represents asolution to release funds quickly (a few days can be enough). It offers companies operating in seasonal sectors the possibility of dealing with fluctuating activities.

Thus, in light of the characteristics of Revenue Based Financing outlined above, merchant cash advance can be considered a form of RBF where the cash advance is made in exchange for a percentage of the credit card sales made by the company.

With each sale, the lender will automatically receive its percentage until the entire principal amount advanced, plus the interest rate amount, is repaid.

It is important to note, however, that the MCA is used more as a solution to short-term cash flow problems , while the RBF is used more to fuel business growth.

Karmen's offer has been precisely built to best meet your company's issues and needs. The various financing products allow you to release immediate funds with 3 watchwords: simplicity, speed and flexibility.

Indeed, financing is accessible in just a few steps, with a response in 48 hours for a customized financing offer totally adapted to your growth and cash flow needs.

To learn more about our three products and how to obtain financing, test your your eligibility. Karmen is the reference in Revenue Based Financing in France and has just raised 50 M€ to continue its growth.

Merchant Cash Advance is therefore a tool that is particularly well suited to the needs of small businesses seeking capital within a limited time frame. In some respects, it can take the form of Revenue Based Financing.