08/23/13

Qualifying for a Merchant Cash Advance

Screen Shot 2013-08-23 at 8.13.55 AMThis type of loan might not be for everyone, and is certainly more expensive than a traditional term loan, however there are situations where tapping into your future credit card transactions could make sense for you and your business. Some of the requirements for a Merchant Cash Advance (MCA loan) are not as stringent as a traditional loan, but there are other requirements an MCA lender will consider in addition to your credit score, time in business, and revenue.

  1. You need to maintain at least $2,500 to $5,000 in monthly credit card transactions: Every lender is a different, but this is a good range to look at before you go into an MCA lender looking for a loan. Because the lender will debit directly from your credit card merchant account, credit score is less important if you have the monthly transactions to support the loan terms. Also, unlike the bank that wants to see three or four years in business, you’ll likely only need to show that you’ve been in business for a year.
  2. You can’t already be working with another MCA lender: This shouldn’t be a surprise to anyone. Although it’s possible to have a couple small business loans or lines of credit open simultaneously, if you already have a merchant cash advance in place, you won’t be able to get another one until the current loan is paid off.
  3. There are not any current liens on business-owned property: This is another stipulation that should make sense. Although the risk tolerance for an MCA lender is different than that of a banker, there are red flags that will kill the deal.
  4. You’ll need to provide financial data to validate past sales and monthly credit card receipts: An MCA lender may be less interested in your credit score than a banker, but they are very interested in validating how much cash flows through your merchant account. They’ll want to see your merchant account bank statements for several months to validate that you have enough transaction volume to support the loan.

An MCA lender is not a factor, but like a factor is looking at your future receipts as collateral for a loan. Some lenders will want to know what the proceeds of the loan are for (which makes sense) and others will only work with businesses who have been in business for a year or more. You should also be aware that an MCA loan is more expensive than a traditional small business loan, but the proceeds are usually available in hours or days instead of weeks or months; and even if you’ve been turned down at the bank because your credit score has taken a beating, you can often qualify for an MCA loan—provided you have the required amount of credit card transactions.

Because the cash is more expensive, some small business owners will use an MCA loan as a bridge to a more traditional term loan. This may be a good strategy because the proceeds from the loan are available quickly. If you’re interested in an MCA loan, a great way to start is to answer a few questions on Lendio to see if you get a match.

CAUTION: Before you sign on the dotted line, make sure you’ve read all the fine print and understand all the loan terms. I recently spoke with a borrower who had taken out an MCA loan to fund the purchase of merchandise from overseas. Although the merchandise was pre-sold and the proceeds should have hit his account as planned—they were later than expected and the lender emptied his merchant account to make a payment, ultimately causing a serious cash flow problem. Every lender and every MCA loan is different, so make sure you understand exactly what you’re agreeing to. This problem could have likely been avoided had the borrower asked a few more questions before the deal was finalized.

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About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

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