Starting a business comes with many challenges, one of them being a short term cash crunch. Often due to lack of liquidity, many merchants or small businesses avoid expanding their operations, which gradually leads to a decline in trade and profits.
To overcome this issue, lending institutions provide various loans based on the needs of the merchants. But what if you are a new business without any credit history or a business whose every loan application has been rejected due to a bad credit score? Merchant Cash Advance is mainly focused on providing loans to such merchants.
Keep reading to know about Merchant Cash Advance and how it works.
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What is Merchant Cash Advance?
Also known as Point of Sale (POS) loans, Merchant Cash Advance (MCA) is a loan or credit facility offered by the lending institutions in the era of contactless payment. MCA refers to a lump-sum cash advance received by the merchants from the lending institutions against future credit or debit card sales.
How Does Merchant Cash Advance Works?
The concept of Merchant Cash Advance is simple. The merchants apply for loans or cash advances from the lending institutions based on the POS transaction history. After verifying the daily sales made by the merchants via POS, the lender deposits a lump-sum amount in the merchant’s account.
Once the cash advance is approved and the amount is deposited, all the sales made through POS by the merchant are directed towards the lender’s account to repay the loan amount.
In a simple context, whenever the merchant sells goods or services to a customer and the customer makes the payment through POS, the amount gets credited directly to the lender’s account instead of the merchant’s account. So, every time a customer makes a payment, the merchant repays a part of the cash advance.
What is the Eligibility Criteria for Merchant Cash Advance?
The merchants must meet the following eligibility criteria,
- Applicants must be a citizen of India.
- Applicants must have a good credit score.
- Applicants must have a stable business.
- Applicants must have a specified turnover as required by the lending institution.
- Applicants must have a POS machine installed in the shop or store.
- Applicants must have a valid POS bank statement.
Documents Required to Apply for Merchant Cash Advance
Mentioned below is a list of documents required to apply for a merchant cash advance.
- Application form
- KYC documents: PAN Card, Passport, Aadhaar card, Voter’s ID card, Electricity bill, Water bill, Driving Licence
- Turnover proof: GST return of last one year, Bank statement of the current account, POS account statement of last one year
- Business proof: Balance sheet, Profit and Loss Account, Income Tax Returns of previous two years
- Any additional documents required by the lending institution
What are Merchant Cash Advance Repayment Methods?
To repay the cash advance, the merchants can choose the following methods,
- Split Withholding Method
The amount of sales made through POS gets split into two parts, out of which one gets credited to the lender’s account, and the other gets credited to the merchant’s account.
- Lock Box or Trust Bank Account Withholding
The entire amount of sales made through POS gets credited into the lender’s account in the lockbox method. After which, the lender deducts the pre-agreed repayment percentage and transfers the balance to the merchant’s account.
- ACH Withholding
According to the ACH Withholding method, the entire sales amount made through POS is credited to the merchant’s account, and the lender deducts the pre-agreed repayment percentage using ACH (Automated Clearing House).
How to Apply for Merchant Cash Advance?
The lending institution follows a specific procedure before approving the MCA. Here are the steps to follow,
- Application and Agreement
The Merchant Cash Advance application can be made online and offline by visiting the official website or the nearest branch of the selected lending institution. To start with the application process, fill up the application form with all the relevant information. After that, upload or attach all the required documents and submit the form.
In this step, the merchant and the lending institution finalise the cash advance amount, repayment percentage per sale, and other essential details. - Approval
In the next step, the lending institution verifies all the documents, especially the POS statement and analyses if the merchant would be able to repay the cash advance in future. If everything is proper, the lending institution approves the MCA within a maximum of 24 hours. - Switching the POS Account
If you have chosen the Trust Bank Account Withholding method, the POS account has to be linked to the lender’s account. This process might take a little time. - Fund Disbursement
After the above steps are completed, the lending institution credits the advance amount to the merchant’s account, and thus, the repayment process also commences automatically.
Benefits of Merchant Cash Advance
Businesses can avail various benefits with Merchant Cash Advance, such as,
- Financial support for short term goals
- No collateral required
- Flexible repayment tenure
- Immediate fund transfer
- Hassle-free automatic repayments
- Applicants having no credit history or bad credit score can apply
Takeaway
Merchant Cash Advance is an ideal short term financial aid for small merchants or those not eligible for other loans due to low credit scores. However, before applying, go through the terms and conditions properly and check for hidden charges.
