Small business owners in India find it extremely challenging to obtain the necessary funding for their various business operations. Lack of collateral, high-interest rates for business loans, lengthy documentation – entrepreneurs and startup owners are forced to look at other avenues to secure financing. 

One such alternative lending option for small businesses in India is – MCA (Merchant Cash Advance). Compared to traditional business loans, a merchant cash advance offers various benefits like – higher chances of approval, flexible repayment terms, and quick access to capital. However, not many people are aware of MCA. 

Here, in this guide, our experts at CreditMantri, explain all that you need to know. From how does an MCA work to where to avail one, this guide answers all your questions on MCA. 

What is a Merchant Cash Advance? 

Technically speaking, a merchant cash advance is not a regular loan. As the name implies, it’s an advance that you avail from the lender against the future credit and debit card transactions of your business. 

How does it work? 

Once you apply for an MCA and get it approved, the lender provides you with a lump sum. You then repay the lender with automatic deductions from your credit or debit card sales. The percentage varies from 5% to 20%, depending on how much amount you have availed as an advance. The repayment period ranges from as little as 90 days to 18 months, depending on your credit/debit card sales volumes.

The cash advance amount you can avail is based on your average monthly credit/debit card sales. Lenders usually advance from 50% to 250% of your credit card sale volumes. The lender will ask you to provide your credit card sales statement for the last three to six months to determine how much you are eligible for.

Additional Reading: Small Business loans

Benefits of Merchant Cash Advance for Small Business Owners 

There are plenty of reasons why a merchant cash advance is beneficial compared to traditional loans. Here are some of the top benefits of availing an MCA.

  • Higher chances of Approval 

Traditional business loans have plenty of eligibility requirements like – high credit scores, collateral, business profitability, and more. In contrast, an MCA does not have any stringent eligibility requirements.

All that the lender considers are the volumes of your credit/debit card sales for the past few months, the number of years your business is in operation, and current debt levels of the company. Hence, small business owners who apply for a merchant cash advance have higher chances of approval.

  • No Hidden Fees 

Another huge draw of a merchant cash advance is that there are no hidden fees and no interest because it's technically not a loan. However, you will be charged APR (Annual Percentage Rates) that can be high. Make sure to check APR rates before choosing a merchant cash advance provider. 

  • Quick Funding

In a traditional business loan, a lender looks at the credit scores and assesses the value of the collateral before sanctioning the loan. The loan application process takes time and borrowers receive the loan amount only after a few weeks or even months.

In a merchant cash advance, there are no credit risks and the lender looks only at your income stream to assess the level of reliability and risk. Hence the entire loan application process takes only 24 to 48 hours and you receive the funding within a couple of working days. 

  • No Credit Checks 

With traditional bank loans, borrowers need to have high personal and business credit scores to qualify for the loan. In a merchant cash advance, the lender doesn’t assess your credit score, so it works great even for businesses with poor or no credit scores. 

  • No Collateral 

Unlike traditional secured business loans, where you have to pledge an asset as collateral, in a merchant cash advance, there are no such requirements. Hence, it's an excellent choice for businesses that don't have any assets.

  • No Restriction on the Usage of Funds 

The funds you receive can be used in any way for the development of your business. There are no limitations, thereby offering you higher flexibility. 

Who can apply for a merchant cash advance? 

While a merchant cash advance is beneficial, it’s not for all. You can opt for a merchant cash advance:

  • If you require quick access to working capital and a significant portion of your sales happen via credit/debit card swipes

  • If you require capital to boost your short-term needs. 

  • To pay for unforeseen business expenses, seasonal inventory purchases, debts and other additional working capital. 

  • If you have no or little collateral.

  • If you don’t qualify for traditional business loans.

  • If you have poor credit scores. 

Industries that are best suited for Merchant Cash Advance

Any business where the majority of transactions happen via credit/debit cards is ideal for an MCA. Some of the best-suited industries for an MCA include:

  • Hotels

  • Restaurants/cafes/bars

  • Beauty salons

  • Supermarkets 

  • Hospitals 

  • Auto repair garages 

  • Retail outlets 

  • And more 

Features of Merchant Cash Advance at a Glance 

Maximum loan amount It depends on the lender. Most lenders are generous and offer loans up to Rs. 1 crore depending on the value of the monthly swipe transactions.
Tenure Highly flexible and range from anywhere between 6 months to 18 months.
Eligible loan amount It's based on the volume of your monthly card sales. Most lenders offer up to 200% of monthly swipe transactions. Higher the credit/debit card sales, the higher the loan eligibility.
Loan disbursal time Approval and disbursal of the sanctioned loan amount are done within 2 – 3 working days. The approved loan amount is sent directly to the current bank account.
Application process Done online with minimal documentation.

 

Required Documentation 

The actual list of documents varies from one lender to another. However, here is the list of standard documentation required:

  • KYC proof – It can be any of the following: Aadhaar card, EB bill, water bill, voter’s ID card, passport, driving license

  • PAN of the applicant as well as the business

  • Business address proof – GST registration, ownership/rental lease agreement, business license

  • Turnover proof – GST returns for the last year, bank statement for the previous six months, bank statement of POS machine for the last year

  • Additional requirements – Details of current loans, balance sheet, profit and loss sheet, income tax returns for the last two years

Additional Reading: CreditMantri Guide to Business Loans

Three Points to Keep in Mind before Applying for a Merchant Cash Advance 

Before you apply for a merchant cash advance, here are a few points to keep in mind:

  • Since the repayment occurs daily, it may reduce the cash flow of your business.

  • Unlike other loans where you save interest when you foreclose it, there are no interest saving benefits if repayments are completed before the decided tenure. 

  • While a merchant cash advance is easy to avail, it's expensive compared to a regular business loan, as it has a high APR (Annual Percentage Rates).

EndNote

Opt for a Merchant Cash Advance and Raise Required Business Capital 

If you're a business owner and require funds immediately, you can opt for a merchant cash advance. However, compare the costs of a merchant cash advance with a regular business loan and choose the right option that best suits your needs.