What is a merchant cash advance?

Small business financing can help you cover short-term expenses or invest in a project to grow your business. But the options can vary widely, and some may be better than others to meet your needs.

A merchant cash advance, or MCA, is a type of short-term financing designed to provide small businesses with cash quickly. An MCA is often easy to access, but it doesn’t work like a traditional business loan.

In fact, merchant cash advances are not loans and are not subject to the same regulatory standards as business loans. This means that you could pay exorbitant fees and end up with several advances at the same time.

Borrowers should proceed with caution. Before you indulge in this quick cash fix, make sure you know the pros and cons.

How does a merchant cash advance work?

A merchant cash advance is an advance on your business’s future credit and debit card sales. In other words, you are borrowing against your future income.

An MCA is a lump sum of cash, and the amount you can borrow varies. Some lenders may allow you to borrow up to 250% of your business’s typical credit and debit card sales. Others offer a fixed amount that can range from $ 2,500 to $ 250,000, although some can run into the millions.

Most often, a merchant cash advance is repaid as a percentage of your daily credit and debit card receipts. You may need to pledge between 8% and 30% of your card sales for reimbursement. The lender sets the percentage and payments are automatically withdrawn from your business bank account on a daily, weekly or monthly basis.

Some lenders can deduct a fixed amount instead. In any case, the repayment is simple because you just need to communicate your bank details to the lender.

A factor rate or factor charge determines the cost of a merchant cash advance rather than an annual percentage rate, which is common with business loans, lines of credit, or credit cards. The factor rate ranges from 1.1 to 1.5, although some lenders may set it lower or higher.

Just multiply the factor’s rate by the amount of the advance to determine how much you will owe. If you borrow $ 100,000 with a factor rate of 1.2, you will repay $ 120,000.

Repayment terms are often eight to nine months, but you can find some as short as three months or as long as 18 months. MCAs, in this way, are more like short-term business loans than other loans, which could give you five or more years to pay them off.

Benefits of Merchant Cash Advance

MCAs offer several advantages over other types of small business financing. One of the main advantages is how quickly you can receive the money. You could be approved for your advance and get the cash in one to five business days, depending on the lender.

“Merchant cash advances are designed to be fast,” says Brock Blake, CEO and founder of Lendio, a small business lending platform. “If your business has an urgent need, like a critical equipment failure or a lucrative opportunity up front, an MCA will give you quick access to funds. “

Yet other features make merchant cash advances attractive to small businesses. Unlike small business loans, no collateral is needed to secure an MCA, but lenders demand a reduction in your future card sales.

This makes it an extremely flexible financing option, says Solomon Berkoff, director of Charleston Capital Management, an asset management firm focused on financing small businesses.

“They don’t require extensive due diligence. They are underwritten on the basis of bank statements,” Berkoff said.

Additionally, he says, the percentage-based repayment plan used by many lenders makes MCAs a good choice for small businesses with fluctuating income. This model allows reimbursement to be commensurate with daily sales of credit and debit cards.

You also don’t need perfect credit to get a cash advance from the merchant. If you have late payments or bankruptcy on your credit report, it may not count against you, like with a traditional business loan. You could get an MCA with a credit score as low as 550, and some lenders can drop to 500.

Why a merchant cash advance might not work

Before committing to a merchant cash advance, consider the cost.

At first glance, it may not seem that high. But you have to look at the actual APR for the entire repayment period. The effective APR takes into account compound interest and fees.

Going back to the example of a $ 100,000 cash advance with a factor rate of 1.2, you will need approximately 360 days for repayment if you expect $ 50,000 in monthly card sales and are withholding 20%. . The daily payment would be approximately $ 333 and the effective APR would be 38.06%.

The higher your monthly credit card sales and the faster you pay off your advance, the more effective your APR can increase. Using the previous scenario, if your card sales hit $ 60,000 per month, you would pay off the advance in 300 days, but the effective APR would go up to 45.68%. Effective APRs can even reach triple digits. There is no benefit to paying off your advance faster as the payments are fixed, based on a percentage of card sales.

When you only look at the actual APR, a merchant cash advance may lose its luster compared to other funding options.

How To Qualify For A Merchant Cash Advance

Good credit is not a requirement, but there are other criteria your business must meet. You often need:

  • An operating history that includes the acceptance and processing of credit and debit card payments.
  • A record of credit and debit card sales.
  • A minimum monthly volume of card sales.
  • A minimum annual income.

Do lenders strictly follow the criteria? Not necessarily. They assess applications on a case-by-case basis and review your full financial situation. Let’s say if you haven’t been in business for a long time but have a good personal credit score, it could work in your favor.

Strong credit card sales are essential for lenders overall. This factor, more than any other, shows the likelihood of your business repaying an advance.

Alternatives to cash advances for merchants

Whenever you make a decision about financing a business, compare all the options first. With that in mind, there are three other short-term funding avenues you could follow besides the merchant cash advance:

  • Short term business loans. A short-term loan can give your business a lump sum to meet its working capital needs or to cover current expenses. It can have a fixed or variable APR. These loans may require personal collateral but no collateral. Short term loans are suitable for established businesses with strong credit scores and solid finances.
  • Business lines of credit. Instead of a lump sum cash, you have access to a revolving line of credit that you can use as needed. You only pay interest on the amount you borrow. A business line of credit is flexible enough to cover just about any financing need. But as with short-term loans, good credit and an established operating history are essential.
  • Business credit cards. Another source of revolving credit, these cards give you flexibility in your spending and allow you to earn points, miles or cash back on your purchases. A business credit card may be easier to obtain than a short-term loan or line of credit, especially if you have a new business. Remember to compare the fees and the APR if you plan to keep a balance on your card.


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