Business funding is the lifeline for any enterprise, be it a startup or an established company looking to grow. While traditional business loans from financial institutions remain popular, merchant cash advances have emerged as an innovative funding solution for Indian businesses over the last few years.
In this article, we shall look into the principles and the top benefits of using merchant cash advances for your business, so that you can make informed decisions.
What is a Merchant Cash Advance?
A merchant cash advance provides businesses with lump-sum working capital in exchange for a percentage of their future credit/debit card sales. The repayment happens automatically through small deductions from the daily card receipts over an agreed period, usually 4 to 18 months depending on sales volume and factor rate months. Merchant Cash Advance (MCA) in business differs from a standard business loan in the sense that the payments fluctuate based on sales volumes.
Key Benefits of Merchant Cash Advances
Here are some of the benefits of merchant cash advances that you should know as a business owner if you are planning to expand your business:
1. Quick Access to Funds
The biggest attraction of merchant cash advances is the speed of approval and disbursal. Depending on the provider, funds will be deposited into an applicant's account within a few days of the application. This is significantly faster than the multi-week or even multi-month timelines associated with secured loans from banks and non-banking financial companies (NBFCs). The rapid influx of capital helps businesses seize growth opportunities at the right time.
2. Minimal Eligibility Requirements
MCAs have less stringent credit score requirements and focus more on sales data than traditional loans. As long as the business has steady monthly credit/debit card sales of a minimum value, the advances are accessible. This helps younger companies and startups with limited financial histories gain working capital.
3. No Collateral or Guarantees Needed
A significant plus is that companies typically do not have to pledge any assets or equipment as collateral to obtain merchant cash advances. Typically, personal guarantees are not required, but this may vary by provider Future credit/debit card receivables serve as the only security for the lending company, significantly reducing or eliminating asset risk for business owners.
4. Customised Repayment Terms
A significant challenge associated with bank or NBFC loans is the obligation to meet fixed Equated Monthly Instalment (EMI) payments, regardless of seasonal fluctuations or downturns in business performance. MCA repayments adjust proportionately with sales volumes. In peak seasons, the deduction is higher, while in slow periods, it is lower. This supports smooth cash flow management.
5. Retain Complete Ownership
As MCAs do not warrant equity dilution or profit-sharing arrangements, companies can raise funds without ceding any control or ownership stake. This helps founders who want to scale up while still retaining control of shares in their business.
6. Suits a Range of Business Models
From retailers to restaurants, salons to auto servicing outlets, merchant cash advances are suitable for most B2C companies with steady cash flows. Even merchants selling via ecommerce can qualify, making it widely relevant.
7. Funds Usage Flexibility
Once disbursed, MCAs offer complete flexibility in end usage. Typically, there are no restrictions on fund usage, but terms vary by provider. Companies can deploy the capital for any valid purpose - be it upgrading machinery, stocking inventory, marketing, hiring staff or supporting day-to-day expenses.
Businesses That Should Consider Merchant Cash Advances
A quick MCA allows companies to access funds quickly in exchange for a share of future card receipts. Certain types of businesses stand to benefit the most from this flexible financing option:
1. Firms with Steady Card Transactions
Companies like retailers, restaurants, salons, and auto service shops that process daily credit/debit card payments from customers are ideal candidates. The card receipts provide the basis for repaying the advance, and higher volumes enable faster payoffs.
2. Seasonal Enterprises
Hospitality, travel, retail and ecommerce businesses with significant seasonal fluctuations can take advantage of adjustable repayment structures aligned to revenue patterns. Payments go down during slow times and go up when sales are higher.
3. Startups and Younger Companies
Early-stage ventures with promising business models but limited financial history and collateral have an accessible option to fund growth priorities before achieving profitability. The only primary eligibility benchmark is monthly card turnover.
Conclusion
Merchant cash advances help Indian companies gain quick access to working capital without asset risks, complicated eligibility norms or repayment challenges. The flexible adjusting deductions make it easier to manage cash flows during business ups and downs.
For founders wanting to retain full ownership and control while scaling up operations, merchant advances present an efficient financing avenue. While slightly costlier than loans, the faster access and flexible structures offset the pricing premiums.
By understanding the benefits of merchant cash advances and their prudent utilisation, merchant cash advances can help growth for small and medium enterprises across sectors.
FAQs
1. How does cash in advance help businesses?
Cash in advance provides Indian businesses with quick funds for urgent needs like restocking inventory or paying suppliers. It ensures smooth operations during cash flow shortages.
2. What is the benefit of a cash advance?
A cash advance offers fast access to money, often within a day, with minimal documentation. It helps Indian businesses handle emergencies or seize growth opportunities.
3. What is the use of a merchant cash advance?
A merchant cash advance provides funds based on future card or UPI sales. These funds can be used to buy equipment or manage daily expenses. Repayments are deducted as a percentage of daily transactions.
4. What is the interest rate on a merchant cash advance?
The interest rate on MCAs is not expressed as an annual percentage rate but as a factor rate, which can make cost comparison with traditional loans challenging. However, generally the repayment for an MCA can be higher compared to bank or NBFC loans.
5. What is the business model of a cash advance?
Lenders in India provide upfront cash and recover it through daily or weekly deductions from sales or bank accounts. They earn through factor rates or fees added to the advance.
6. How can I calculate a merchant cash advance?
Multiply the advance amount by the factor rate (e.g., ₹10 lakh x 1.3 = ₹13 lakh total repayment). Repayments are taken as a percentage of daily card or UPI sales.
7. Is a merchant cash advance right for me?
It’s suitable for Indian businesses with high card or UPI sales needing quick funds, but high costs can strain finances. First, explore cheaper loans from banks or NBFCs.
8. How quickly can I get a merchant cash advance?
In India, you can get a merchant cash advance faster after applying. Approval is quick due to simple checks on sales and business history.
9. Who is eligible for a merchant cash advance?
Indian businesses with steady card or UPI sales, at least 6 months of operations, and monthly revenue (e.g., ₹5 lakh+) qualify. Poor credit may not be a barrier.