The cash advance industry is becoming more popular among business owners lately as many entrepreneurs are looking for ways to gain access to cash. If you’re thinking of taking out a cash advance, be sure you completely understand this type of financial product.
A cash advance is essentially a way for a bank to give a person money based largely on the promise of future income. For a person with a job, a cash advance lender or bank will extend a small amount of money based on the amount of income that person is expected to bring home in their next paycheck. The amount is repaid when that person receives their paycheck.
What’s the meaning of MCA?
An MCA or Merchant cash advance is a type of cash advance that is designed specifically for business owners. When a person is running a business, it is common to need access to money before all of the invoices that they have sent out to customers get paid. For example, a business owner may need to rent heavy equipment to do a job, fully expecting to be paid when that job is complete. In other cases, they may need to purchase inventory or make payroll while the invoices that have for the labor or goods being provided haven’t been paid yet by their customers.
Larger companies may have enough cash in reserve that they don’t need to be concerned with these issues, but that is rarely the case for smaller businesses or businesses that are looking to expand. Traditionally, owners of these types of businesses would have to spend a lot of time talking to banks and filling out paperwork, trying to convince someone to give them a loan. The process could easily take months, at which point the market opportunity to bid on a big project and expand their business was gone.
Merchant cash advances were designed to fill this gap. Instead of business owners taking weeks or months to go through the entire process of getting a loan, an MCA can be applied for in a matter of minutes. The money often appears in the business account within a few days.
How big is the merchant cash advance industry?
Cash advances have been around for centuries, and it can be a convenient way to get access to funds. Merchant cash advances are somewhat newer, and not as easy to find.
At the present time, the total size of the merchant cash advance industry in the United States is around $620 million. By 2030, however, that amount is expected to grow to $26 billion. That’s an incredible rate of predicted growth!
The reason for this is because so many economists are forecasting that there will be a huge need for working capital among small and medium business owners. The ongoing supply chain problems have increased the amount of time it takes between merchants ordering goods (which is when many small businesses have to pay for them), and when they will actually receive and sell those goods. Economic pressures on individuals and businesses mean that even service providers such as plumbers and electricians are already reporting a longer amount of time between when they complete a job and when the invoice is actually paid.
The result is that more and more business owners are turning to merchant cash advances to fill the gap between the time when they need to pay bills and when they actually get paid. Used correctly, these products can be a valuable tool to help a business grow.
How do cash advance companies make money?
The companies that offer these products make money by charging interest on the cash that they extend. These products work by placing money into the account of a business owner. The business owner can then use that money however he or she needs to for their business.
When the business owner agrees to take an MCA, he or she will also state how they want to repay the funds they take. This is usually done by making payments directly from a checking or savings account. It is possible to break up payments into several installments or agree to pay back one lump sum.
It is also possible for the cash advance company to take the money directly from the credit card sales of the business. The customers of the business will not notice anything different if the business chooses to pay back the cash in this way. Customers will still swipe their card to pay for goods and services.
Under this payment option, however, the money from the sale is automatically diverted to pay back the MCA. Payments can be set up so that just a portion of each sale go back to the MCA, or they can be set up so that all credit card payments are diverted until the MCA is paid off entirely.
In a lot of ways, the cash advance company makes money from MCA in the same way that a corporate bank does with a loan. The difference, of course, is that an MCA isn’t tied to any assets of the business. The business is not in danger of losing valuable equipment or property if there are delays in paying back the MCA.
If you are a small business owner who needs a small amount of cash to get through a difficult time, expand his or her business, or just to pay the bills until customers pay you, check out the financing options available with iKahn Capital. They have a alto of great products designed specifically to help small business owners in all stages of their business cycle.