Merchant Cash Advance for Construction Companies: Good or Bad?
Financial difficulties are not an uncommon theme for growing construction companies.
In the construction industry, it’s not easy for contractors with a relatively new and short business span or irregular income to secure the funding they need to complete projects and cover daily operating costs.
And because traditional options like bank loans tend to reject loan applications from builders who have not been in the business for long or do not show a steady monthly income – they’re forced to consider alternative funding sources.
Merchant Cash Advances (MCAs) have become a popular alternative for many construction companies because they’re easy to obtain.
- But how exactly does a merchant cash advance work?
- And is it the answer to your financial problems?
This article answers these questions and any others you might have about MCAs. So let’s get right to it.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) is an alternative source of business funding that provides you with a lump sum of cash upfront or in advance.
It is technically not a loan, but you must repay the advance through a percentage of your future sales or income. This percentage can be deducted daily or weekly depending on the agreement made with the merchant cash advance provider or broker.
Getting a merchant cash advance is pretty quick and easy. Your application can be reviewed and approved within a day, and you can get access to funds within another day or two.
How do Merchant Cash Advances Work?
The application process for a merchant cash advance is relatively straightforward and can be carried out online for most providers. The advance you can get will not depend on your credit score or history but on how much income you generate and how frequently you generate it.
Lenders will review your bank information to have an idea of your current and expected revenue. They then use that information to establish how large an advance you can be given and how much can be automatically deducted from your bank account daily (or weekly) for repayment.
MCAs are not to be confused with invoice factoring. With invoice factoring, you sell your invoices (or accounts receivable) to a company for a lump sum payment today. Merchant Cash Advances use your credit card payments history (on your merchant account), not future invoices.
MCAs can often be challenging to repay as they often have very, very high-interest rates and APRs ( Annual Percentage Rate).
You may also need to pay a commission to your broker if you secured the advance through one. The total cost of the amount you’ll repay will be calculated using a factor rate that multiplies the principal advance.
For example, if an MCA lender or company approves your request for a $50,000 advance with a factor rate of 1.5 – you will need to repay up to 1.5 x $50,000 = $75,000 minus broker fees.
A holdback percentage is the percentage of your daily credit card income/transactions that will be automatically debited from your account daily or weekly until you completely pay back your advance. It usually ranges from 10% to 20%.
Following the first example, if you agree to a holdback percentage of 15% weekly and record an income of $20,000 this week, 15% of $20,000, which is $3,000, will be automatically deducted from your account.
In the next week, if you record transactions of up to $25,000, 15% of $25,000, which is $3,750, will be deducted. And so on until the entire $75,000 has been repaid.
The terms of the MCA contract will determine the exact structure of daily or weekly repayment.
A Merchant Cash Advance will typically have the following terms and features:
- Principal amount: which usually ranges between $5,000 to $500,000.
- Factor rate: which can be as low as 1.09 on low principal amounts and as high as 1.5 on higher principal amounts.
- Holdback:- usually between 10 - 20% of your daily or weekly credit card transactions.
- Repayment period: which can range from 3 months to 24 months.
- Repayment frequency: which can be daily or weekly and is usually processed automatically.
Once again, it is crucial to review the terms of your MCA contract, preferably with an attorney.
Merchant cash advances can seriously strain your cash flow, especially when the terms of repayment allow daily deductions from your account.
They’re also notoriously difficult to pay back. It is not uncommon for builders to look to another merchant cash advance to pay off an existing one. You should avoid this as much as possible.
You should only consider getting an MCA when you need to fund a project that can yield a high enough ROI that you have no issues with paying back the advance, such as purchasing a quick turnover inventory.
Pros and Cons of Merchant Cash Advance for Construction Companies
- Straightforward application process
- Requires little paperwork
- It does not require strong credit
- It does not require collateral
- Easily approved
- Quick access to cash
- Can be very expensive (70% - 200% APR)
- Stiff defaulting penalties
- Terms of contract may be confusing and are usually unfavorable
- It does not help build business credit
- Requires that you accept credit cards
- Daily deductions put a strain on cash flow
- This can lead to stacking and hence more enormous debts
Best Alternatives to Merchant Cash Advance for Contractors
Arguments are constantly being made about whether merchant cash advances are ideal for contractors and construction companies.
Income in the construction business is often irregular, and MCAs require that you pay back with daily or weekly debits regardless of the state of your cash reserves. This is why experts advise builders to seek out other fast and convenient alternatives to merchant cash advances.
Some of the best alternatives to Merchant Cash Advances are:
- Toolbox Corporate Card:
The Toolbox corporate card may be the best alternative to merchant cash advances.
It is a corporate card built explicitly for contractors and small or new construction companies.
The application process for Toolbox cards can be done online in less than 10 minutes, and you can get approved that same day.
Once approved, you have access to funds and can start spending immediately with the Toolbox virtual cards.
So if you need some quick cash to complete your projects or cover operating costs, there’s no better option out there. Then, you can proceed to create unlimited virtual and physical cards for you and your crew to make purchases anywhere.
And with every swipe, you earn tailored rewards that help you get better deals on everything from project materials to new equipment.
In addition to providing the funds you need, Toolbox lets you track and manage your spending with a simple but powerful spend management tool that you don’t have to pay extra for.
You can set spending limits, manage project spending and carry out specific project-based costing.
With all these incentives, you might expect high fees and interest rates, but this is where Toolbox stands out. You have 30 to 45 days to pay your balance, and it comes with no interest charged at all!
Toolbox does not require any transfer, setup, or card replacement fees. Toolbox also does not require a personal guarantee or security deposit either.
This nonprofit lender provides microloans for startups and small businesses. You do not need a high credit score to qualify for this loan, making it a good option for new construction companies.
Accion loans can grant you between $500 to $150,000 with an APR of 5.99% to 25.99%. Unlike merchant cash advances, you pay back the loans monthly, and there is no fee for early repayment.
You can complete the application process online in about 15 minutes. The best thing about Accion loans is that the terms are pretty flexible and can be worked out to suit your specific situation.
However, you must have been in business for at least 12 months to qualify for this loan. It also requires a lot of documentation and takes longer to get approved.
BlueVine provides three funding options for small businesses that contractors and new construction companies can use as an alternative to MCAs.
You can get approval for a Line of Credit (LOC) loan within five minutes and access funds that same day through a straightforward online or phone application process.
BlueVine Flex Credit LOC requires you to have been in business for only 6 months and record a $10,000 monthly income before applying. You can borrow between $5,000 to $5 million and payback within 6 to 12 months with an APR of 17% - 60%.
The downside is that you need to qualify with an above-average credit score of 600.
Additionally, contractors and construction companies that work majorly on individual projects cannot apply for these loans as they are only available to B2-B businesses.
PayPal offers short-term loans to interested borrowers with a credit score of at least 550. Short-term loans are like merchant cash advances but typically have better terms.
To qualify for this loan, you must have been in business for 9 months and have annual revenue of at least $42,000.
You will need to fill out a 5 to 10-minute questionnaire to apply, and if you’re eligible past this stage, you can customize the terms of your loan, including the amount you want to borrow and your repayment terms.
You will need to be registered with PayPal Business to access this service.
This loan does not technically require collateral, but you will sign a personal guarantee that authorizes PayPal to seize your personal assets should you default on repayment.
Final Thoughts - Are Merchant Cash Advances Best for Your Construction Company?
Merchant cash advances are more accessible to obtain than traditional loans, and they don’t require you to have strong credit or collateral. This made them increasingly popular among new and cash-strapped contractors.
However, builders have realized that merchant cash advances are not all they appear to be.
The extremely high-interest rates and APRs make it difficult for you to pay back.
Daily deductions strain your cash flow, and the penalties for defaulting on payment can be pretty harsh.
MCAs have their uses, and sometimes you can just about get away with using them as a source of short-term funding.
But it would be better to consider other options that do not put you under so much pressure.
We discussed several of these alternatives, and the one that stood out the most was the Toolbox corporate card for construction companies.
A funding option tailor-made for contractors and construction companies, it is an alternative that understands your plight like no other.
Besides being just a source of funding, you can also use the platform to track and manage your spending on the field. Moreover, there are no sign-up fees, and you can get started for free.