What is a Merchant Cash Advance?
The mechanism in which the merchant running a business pays lump sum amount in advance to suppliers via its daily or future credit or debit card transactions is termed as Merchant Cash Advance. Many times, merchants of small and medium business experience short-term cash crunch. Due to lack of enough assets and unpredictable cash flow, sometimes they are unable to qualify for regular bank loans. Hence, to reduce liquidity crunch in the business, merchants opt for Merchant Cash Advance in India, popularly known as MCA.
Although the interest rate are relatively on higher side but still it is popular among merchants, as its repayment facility is linked with daily sales collections from Point of Sales (POS) machines placed at retail shops, supermarkets and shopping malls. The merchant’s cash advance is the boon for the merchants those who cannot get regular bank loans due to stringent checks and mandatory requirements.
Eligibility to avail Merchant Cash Advance (MCA)
|Eligibility to avail Merchant Cash Advance (MCA)|
|The Applicant||Must have good CIBIL/credit score|
Should be into a stable business
|Annual Turnover||As per lender’s criteria|
Usually, while processing the loan application, the lender decides a fixed percentage of annual turnover, as an eligible loan amount
|POS Machine||Merchant must have POS machine in shop or store|
Lenders may ask POS banks statement to ascertain eligibility
Features & Benefits of Merchant Cash Advance (MCA)
- The repayment plan is decided based on daily collection at the Point of Sale (POS) machine in the shop. The fixed percentage of the daily collection is transferred to the lender account automatically. Such a percentage is called a ‘Holdback Percentage’
- Even if loan repayment gets faster, the merchant does not get the advantage of the interest cost
- Since the repayment is aligned with the credit at Point of Sales (POS) machine, it is preferred way for merchant and lender both. For the merchant, it gives flexible payment linked to the sales. For the lender, it is transparency linked to POS machine’s bank account
- The repayment is hassle-free and automated, as the amount equivalent to holdback percentage is automatically transferred to the lender’s account, as per agreement between merchant and lender
- No collateral is required to avail the Merchant Cash Advance. Since the lender can easily create the charge on POS machine’s bank credits, there is no additional requirement of security or collateral
- Since the process to disburse MCA amount is very quick, the loan amount is credited to the merchant’s bank account almost immediately
- The application process to avail Merchant Cash Advance is extremely simple and quick. Hence, you don’t have to prepare a bunch of documents and visit the bank multiple times in order to avail the fund.
Also Read: How to get collateral free business loan?
Documents Required to Avail Merchant Cash Advance
|Applicant’s KYC Documents||PAN Card|
Passport, Aadhaar card, Voter’s ID card, Electricity Bill, Water bill, Driving License
|Business Address Proof||Ownership agreement or Rent agreement of business premises|
|Turnover Proof||GST return of last 1 year|
Bank statement of the current account & POS machine’s account (last 1 year)
|Additional Requirement||Details of existing loans and repayment status|
|Business Financial Document||Balance sheet, P&L Account, Income Tax Returns of last 2 years|
Repayment Plans of Merchant Cash Advance
Since Merchant Cash Advance is solely based on the amount received through Point of Sales (POS) machine, the repayment method is also aligned to the credit amount in the POS machine’s bank account. Usually, there are three different options, out which anyone can be chosen based on an agreement between merchant and lender.
|Option-1: Split Withholding Method||Point of Sales (POS) machine’s sales amount is split into two parts: One part is credited to lenders account towards repayment of the loan and the other part is credited to the merchant’s bank account.|
The entire process is automated and seamless, hence preferred by most merchants and lenders.
|Option-2: Trust Bank Withholding Method||The entire amount of Point of Sales (POS) is credited to the bank account operated by the lender. The lender deducts pre-agreed amount towards repayment of the MCA loan and transfers balance amount to merchant’s bank account.|
|Option-3: ACH Withholding Method||The amount received at POS machine gets credited directly to lenders’ account. After deducting agreed repayment amount, the balance payment is transferred to the merchant’s account.|
Should I avail Merchant Cash Advance?
You can avail the merchant cash advance facility to fulfil your urgent financial commitments. It saves your time to meet short-time cash crunch. Moreover, you can repay as you get the cash flow. There is also no need to arrange the collateral to get MCA. Hence, there is no fixed amount of cash outflow like bank’s EMI. However, the rate of interest is comparatively high. Hence, you would end up paying a high cost for the convenience of availing quick finance. It is recommended to avail the bank loan, as far as possible. In case you cannot arrange it, you can use MCA on a temporary basis.