Finance from Spotcap - main features
Access to finance is at the heart of a healthy business. A merchant cash advance alternative from Spotcap helps businesses manage cash flow and cover unexpected expenses. The features are:
How a Spotcap credit line works
Finance from Spotcap works in the form of a business line of credit, with a focus on simplicity and flexibility
Understanding Merchant Cash Advances
What you need to know as a business owner
What is a Merchant Cash Advance (MCA)?
- A merchant cash advance (MCA) is a financing instrument for businesses whose revenue mainly comes from credit card transactions. In exchange for an agreed lump sum of money, the business offers a percentage of its future card sales until the amount is repaid.
- When considering this financing option, a borrower should be aware of two types of figures – the factor rate and the holdback percentage. The factor rate is a decimal figure and determines the full amount that is to be returned to the MCA provider. The holdback percentage refers to the agreed proportion of credit card revenue that goes directly into paying the MCA provider back on a regular basis until the full amount is returned.
- At first glance, this model can seem very similar to a traditional business loan, but it shouldn’t’ be interpreted that way. Practically speaking, an MCA provider is purchasing future credit card revenue, rather than providing a loan which is sometimes secured by some sort of collateral.
Benefits and drawbacks of an MCA
- Pro: When compared to traditional financing, a merchant cash advance (MCA) is a faster and more straightforward option. Because it’s based on previous credit card receipts, it doesn’t require any additional collateral.
- Con: A lack of collateral means higher risk for the MCA provider, which is mitigated through the holdback and factor rates. An MCA isn’t assigned an annual percentage rate (APR) and when the numbers of the holdback rate add up, an MCA can prove to be considerably more expensive than other financing alternatives.
- Pro: Because the holdback percentage is based on credit card revenue, the repayment transactions are also not a fixed number, but can adjust with the flow of business. If the company experiences a slow period in terms of sales, the MCA repayments reflect that, and the same goes for periods when sales are high.
- Con: Since the repayment method is based on card sales, MCA providers can impose restrictions on businesses on any of their activities that might discourage customers from using card transactions. This can substantially limit a company’s ability to make flexible decisions on their business models.
Businesses which might not benefit from an MCA are those who don’t have a predictable card sales volume and rely on other payment methods. In addition, an MCA is better suited for short-term funding and usually isn’t enough to support larger financial endeavors like corporate property purchasing.
MCA alternative: An unsecured business line of credit
- An unsecured business line of credit holds many of the advantages that a merchant cash advance provides, while eliminating the limits MCAs put on a company’s flexibility. It doesn’t require any collateral and businesses can apply quickly online without having to wait long for an assessment. In addition, funds from a line of credit can be handled as best seen fit, without the need to impose limitations.
- A business line of credit works differently from other financial instruments, because it works on the basis of providing funds that don’t necessarily need to be withdrawn in full. For example, if a business is given a line of credit worth $100, 000, they can choose to withdraw only $50,000 of that and leave the rest. In contrast, an MCA provides capital that needs to be repaid with added interest, regardless of whether or not the borrower has used all of the funding.
- In terms of repayment, the instalments for a business line of credit can gradually become smaller, because interest is based only on the outstanding withdrawn amount. If we take our previous example, the interest rate for repaying back the funds is not based on the $100, 000, but on the withdrawn $50, 000. The more that has been repaid from that funding, the smaller the future instalments become.
All of these factors provide businesses with greater flexibility to manage their financial plans without introducing additional conditions and requirements. For a more in-depth look into unsecured business lines of credit, see our page for more information.
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