What is Merchant Cash Advance?
Merchant Cash Advance is a new type of funding designed specifically for small businesses which do a lot of business through card transactions and is in need of some funds on an urgent basis. A funding culture that is widely in vogue in the US and Canada for a long time now, is now getting popular in India primarily for its simplicity and convenience in raising funds by a small business. A Merchant Cash Advance, simply put, is a Loan made to merchants by lenders against their future card payment receivables. Thus, it is either a loan against POS machine Card transaction or MCA.
Why is it an ideal funding option?
Businesses operating in the MSME space, i.e. Micro, small and medium enterprises often lack organized finance options and resort to borrowing from friends and family when urgently in need of cash. For such businesses, provided they have a regular income inflow through card transactions, merchant cash advance is fast becoming an ideal way of funding – Simple, Fast and Convenient!
How does it work?
Let’s take an example to understand this…
If you are a company who has a lot of customers buying products online or offline using their cards, you can take a Business Loan, or a loan against POS machine, against the future business that you will get through such credit card swipes. The lender would give you the loan, which is then paid off automatically over a period of time, when the lender takes a percentage of your daily credit card transaction receipts.
The loan amount that a business can get is determined by its average Debit/credit card sales/transactions which is assessed from their income flow of the previous 6 months. The lender usually ties up with the card payment processor so that the decided percentage of the card sales of the merchant is transferred directly to them. The repayment period starts immediately after the loan is disbursed and ranges from 180 to 360 days. Naturally higher percentage calls for shorter time duration and vice versa.
Merchant Cash Advance – Benefits
A plethora of reasons make loan against card swipe a very attractive MSME finance option. These are:
- Ease of Application – Just an online form to be filled up and documents such as bank a/c statement, card processing statement etc uploaded
- Quick Processing – Fintech NBFC financers such as TAB Capital LTD is known for using state-of-the-art technology so that loans can be disbursed within 2 days.
- Eligibility – More focus on card transaction history
- Collateral – No collaterals required.
- Loan Limits – Higher borrowing limits provided than banks
- Repayment – Since repayment is a certain percentage of your future card receipts, repayment is pretty flexible without any extra pressure on the merchant.
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Merchant Cash Advance – A Simple & Convenient Finance Option