business partners looking over merchant cash advances

In Focus: Merchant Cash Advance Requirements

Small businesses that run into cash flow problems can obtain a line of credit with a major bank, provided they meet the credit criteria. For those that don’t, one alternative source of funding is a merchant cash advance (MCA). 

While the requirements for an MCA are not as strict as a traditional bank loan, there are risks, not the least of which are defaulting and the potential for business bankruptcy. Let’s take a look at the requirements for a merchant cash advance and what to do if your business defaults on an MCA agreement.

Merchant Cash Advance Requirements v. Bank Loan Requirements

Both merchant cash advances and bank loans provide a lump sum of cash to businesses that need working capital. However, banks evaluate businesses differently than merchant cash advance providers. 

To determine whether a business is a suitable candidate for a bank loan or line of credit, loans officers will consider:

  • The business owner’s credit history
  • The owner’s liquid assets
  • Collateral

But the application process is lengthy and complicated, which could make matters worse for an already struggling business. By contrast, an MCA provides a business with quick access to a lump sum of cash; and approval rates are higher than those for bank loans.

While the business owner’s credit score may impact the amount of the advance and the factor rate, it is not an overarching factor in the approval process. MCA providers typically require a business to be operating for at least 3 months and will review credit card sales and checking account deposits during that time. 

Other important factors in obtaining a merchant cash advance include:

  • The type of business
  • The business’s average daily checking account balance
  • Overdraft fees
  • Negative balances

Once the business is approved for an MCA, the repayment scheme also differs from a bank loan. In short, a bank loan is repaid at the same rate each month while a merchant cash advance is paid back based on a previously agreed-upon percentage of the business’s daily credit card sales.

What Happens If My Business Defaults On A Merchant Cash Advance?

A merchant cash advance may seem like a perfect solution to your cash flow problems, but defaulting on the repayment will put your business in a world of hurt. 

First, an MCA agreement usually includes a confession of judgment (COJ) whereby you acknowledge liability for the advance and waive any legal defenses. This means that the business can quickly obtain a court judgment in the event of default and begin seizing your business assets.

Also, it is becoming increasingly common for MCA providers to require business owners to sign personal guarantees, which means your personal assets – a home, car, bank accounts – will also be in jeopardy. 

But there is a way out of these dire straits. A merchant cash advance agreement should include a reconciliation clause that requires the funder to restructure the payment plan if your business experiences a receivables shortfall, as long as you can show your business can return to profitability.

The Takeaway

Applying for a merchant cash advance is easier than applying for a bank loan, but defaulting may force you to close your business. By working with an experienced debt relief specialist, you can reconcile your merchant cash advance and protect the business you’ve worked so hard to build. Get in touch with our team today.