How Can Merchant Cash Advance Facility Help SMEs?

Being a businessman, you may need some emergency capital at any time—be it for adding more items into your inventory or for fulfilling a bulk order. At times like this, a bank loan and the elongated processing time may not be the right choice. What alternate methods can you choose to fulfil your immediate business requirements? Merchant Cash Advance is one method that you can rely on.

1. What is the Merchant Cash Advance (MCA) method?

A merchant cash advance facility refers to a cash advance received from a lending institution that is based on the credit/debit card sales deposited in the merchant’s account. When a merchant applies for a loan, he gets the lump sum deposited in his account to be used for fulfilling business commitments. He will then repay the received loan through the transactions done on his Point-of-Sale (POS) machine. Such a cash advance is disbursed within two-three days at the latest.

The lenders look at the POS transaction history to evaluate the risk of lending money. The daily credit/debit card receipts will be considered to figure out if the business can repay the borrowed money within a specified period. Once the funds are acquired, all the card mode payments will be redirected towards the lender’s bank account for repayment.

2. What are the eligibility criteria?

The eligibility criteria to avail merchant cash advance may differ based on the lender. However, there are a few standard criteria that you must be aware of before applying for the facility with any lender:

• It would be good for the applicant to have an excellent CIBIL score (credit score).
• The business must have a solid track record over the past.
• The annual turnover of the business must be in the range recognised by the lending institution. You must provide proof for the said turnover with valid documents, such as a copy of the ITR filed.
• An essential requirement to qualify for a merchant cash advance facility is to have a POS machine at the store. You may be required to share a copy of the POS bank statement to prove the eligibility.

3. Features and benefits of the MCA method?

There are several features and benefits of the Merchant Cash Advance facility, such as:

• Easy Application: Many financial institutions offer online application processes for merchant cash advance facilities. The online facility makes it simpler for the applicants to research and compare different options and then apply with minimal efforts.
• Collateral-Free Loans: The merchant cash advance method does not require you to provide any personal assets as collateral. However, your card swipes and transactions will be considered as collateral in this case.
• Quick Approval: Unlike bank loans and other government schemes that support SMEs, merchant cash advance facility comes with a quicker approval process. On average, it takes around two-three days for approval.
• Simple Eligibility Criteria: The eligibility criteria to avail merchant cash advance are convenient and straightforward. Refer to the ‘Eligibility Criteria’ section for more details.
• Flexible Repayment: You don’t have to get pressurised regarding the repayment as the deductions are made daily from the transactions of your point-of-sale machine. There are no fixed intervals to make repayments and no fixed amount to be paid per instalment.

4. Repayment methods

There are three possible repayment structures, as explained below:

a. Split Withholding Method: The sale amount swiped on your Point-of-Sale machine will be divided into two parts, where one part will be credited to the lender’s account towards the repayment of the loan and the other part will be credited to the borrower’s account. The process is automated and hassle-free making it the most preferred repayment method for many borrowers.

Trust Bank Withholding Method: In this method, the entire amount swiped on your POS machine will be credited to the lender’s account. The lender retains the amount pre-agreed for repayment and transfers the excess amount to the borrower’s account.

ACH Withholding Method: The amount received over the POS machine will be sent to the lender’s account. Once the pre-agreed amount is successfully credited to the lender’s account, the amount received in the further transactions are redirected towards the borrower’s account.

5. Who should opt for the MCA method?

Merchants who are in the urgent requirement to catch up on their financial commitments can choose the merchant cash advance method. The method is suitable to make short-term cash emergencies, and you can repay the borrowed amount as and when you come across cash flow.

Those who use POS machines for daily transactions can get loans against their credit/debit card sales. Business owners who get consistent card settlements can use this facility.

6. Frequently Asked Questions (FAQs)

Q. Do I get to save interest if I repay the loan quicker than the said tenure? A. No, you will not get the benefit of saving on interest payment even if you repay the loan much before the said tenure ends.

Q. Does the facility come with zero interest rate? A. No, the interest rate on the facility may be slightly higher, given the convenience of receiving quick finance.

Q. Is the facility 100% collateral-free? A. Yes, you do not have to provide any personal assets as collateral to receive the loan making it easy for individuals with no personal assets to borrow money. However, you must keep in mind that the card swipes in your business may be entirely redirected towards the lender’s bank account for repayment based on the repayment method applicable.