Is Merchant Cash Advance The Best Financing For Real Estate?
A MCA (Merchant Cash Advance) is a type of short-term financing in which the lender gives financing for a merchant and the repayment is agreed as a percentage of the future cash flow of the merchant, mainly in the form of credit card/ debit card transactions. Companies provide this small-business financing at a higher interest rate than other Long Term loans such as bank loan and integrate their account directly with the merchant’s cash clearing processor of card transactions.
A closer look into MCA for business expansion
Application for Merchant cash advance is easy and convenient and is quickly processed and approved, with many companies allowing online submissions. It is a one step stop for merchants in need of urgent financial support who cannot afford to wait for the painstaking process for long-term business loans from banks, such as giving an advance for a real estate purchase. Repayment is also flexible, as a percentage of the future sales and no minimum monthly installments to be paid. Selecting the lender should be done by keeping the following points in mind:
It is ideal that the lender accepts multiple types of transaction facilities such as non-credit card and physical payments also along with POS terminals and credit cards.
Opting for a company having a good history of helping startups and businesses having a low credit score is a safe step taken.
The fees charged by the lender should be justifiable and not very high because of the bad credit.
Convenient and quick application process is one of the factors going in favor of merchant cash advance, many lenders allow online submission of application, some even give a response in a short interval as small as 60 seconds.
If the merchant account offered by the company is supported by multiple underwriting banks, if any of them withdraws support, the startup will have a backup.
Though obtaining an advance financing seems to be easy, its repayment is not that beneficial. For example, for a real estate company, the sales number may be less with larger intervals between each sale. Also, deals are not usually made in one go, often a lock-in period of 3 or more months are provided before the deal is finally closed. Given the nature of merchant cash advance, two issues affect the real estate business:
The annualized payment rates (APR) of interest are very high and can be detrimental for small firms and start-ups in real estate, which is usually a high investment sector subjected to market trends.
Since the repayment is scheduled in a small time frame (24 months or much lesser), it will take away a huge percentage of the company’s cash flows, giving less scope for its expansion. The long business intervals in the real estate business add more problems to this.
Since these advances are not generally considered as loans, chances for early one-time settlements or interest wavering schemes are rare.
A merchant cash advance literally drains out the cash flow of the company, leaving it with fewer funds to actually expand. Usually, the merchant opts for this funding because of the lack of knowledge about other alternative funding solutions available. Some of the alternatives are:
Collateral, commercial loans
Small business loans
Short-term working capital loans
Expanding your real estate business with financing
There are several dedicated companies lending out MCA like an unsecured loan for real estate business for infrastructure building, repair and renovation, advertisement and business expansion. You can also get a quick advance to initiate a deal and pay it off immediately after the deal closing to avoid draining your profit. If you are facing a shortage of capital at the last moment while collecting funding to complete a purchase, again BCA (Business Cash Advance) is helpful.
Repayments are automatic depending on your income. Even if you have bad credit history and high NSF (Not Sufficient Funds) incidences, you can easily find a high-risk lender. For companies operating varied businesses out of their own property such as restaurants, infrastructure providing, rentals etc, getting a working capital loan is a better option than going for commercial loans on mortgage. Real estate owners can also explore credit opportunities in the form of unsecured business loans.
Be cautious with position
Many small business borrowers have a tendency to pile up on financings obtained from MCA to meet expenses in real estate bids. The subsequent lenders are given lower position and subordinate claim compared to the lender in the first position. Additional financing comes with higher rates of interest and shorter payback times which should be paid off as soon as possible to prevent all your business going into credit resolve. Real estate deals come with high amount transactions and wise management of the huge cash flows into prepayments can help not only in clearing debts but also in the expansion. So, instead of offering 1st Position, 2nd Position, 3rd Position, 4th and 5th Position to the lenders, depend on a single lender and minimize additional interests, repayment issues, and multiple contracts.