A merchant cash advance (MCA) is a popular form of financing especially useful for businesses with limited access to traditional bank loans.
In this blog post, we’ll provide a complete guide to merchant cash advances so you can decide if it’s the right financing option for you.
We’ll cover what an MCA is, who should apply for one, their pros and cons, their uses, how to apply, and the best providers.
What Is a Merchant Cash Advance?
A merchant cash advance (MCA) is a form of alternative financing that provides businesses with a lump sum of capital in exchange for a portion of their future daily debit and credit card sales.
This makes it an ideal solution for businesses that may have difficulty accessing capital from a business bank account because, instead of extensive financial business data, this uses your estimated future daily debit and credit card sales.
A merchant cash advance repayment is typically made over an agreed-upon period, usually between 3 and 18 months. During this period, the merchant will pay back the advance through a holdback of their daily credit and debit card sales.
The great thing about merchant cash advances is that they are easy to qualify for, and the funds are typically made available quickly.
However, it is important to understand that merchant cash advances come with high fees, so it is important to understand how they work and carefully weigh the pros and cons before taking out one.Discover other ways to finance your business
How Do Merchant Cash Advances Work
When you get a Merchant Cash Advance, your business will receive a deposit from the finance company, usually very quickly, in exchange for future credit card sales.
Most institutions that offer MCAs will ask you for daily payments (although some offer weekly or monthly payments). You can pay directly, or the lender will retain a percentage of each sale.
The problem with this credit option is that, of course, you do not sell the same amount of money every day, you could be facing a low season or a high season. This means that depending on your sales, it could take you more or less time to pay off your cash advance.
MCAs do not use this method, they use factoring rates that typically range from 1.1 to 1.4. I know this sounds confusing, so it’s best to think of them as percentages: a factor rate of 1.1 equals 10%, a factor rate of 1.2 equals 20%, and so on.
MCA lenders don’t ask you for collateral, so your personal and business assets stay safe. Although, in a way, your future credit card sales are the collateral.
Merchant Cash Advance Example
If a business requires $10,000 and has an average daily debit and credit card sales of $1,000, the lender may agree to advance the $10,000.
The business will then pay back the total plus a fee based on the percentage of their daily debit and credit card sales.
So, the MCA lender and the business owner will agree on a percentage, let’s say 10%, of daily credit card sales.
So the first day, the business makes $1,415 in credit card sales. This means they have to pay $141.50 that day. The repayment will continue until the $10,000 plus the fee is paid in full.
What are the Pros of Merchant Cash Advances?
- Access funds quickly. It is a great way to quickly access funds for your business without a traditional loan’s lengthy process and strict criteria.
- Repay funds over time. Merchant cash advances are repaid through a percentage of future credit card sales, meaning you don’t have to worry about a large fixed monthly payment.
- No collateral required. Many of them don’t require any collateral, making them a viable option for those without the ability to provide security for a loan.
- Credit score is not considered. They don’t require a credit check, which makes them a great option for those with bad credit.
What are the Cons of Merchant Cash Advances?
- High Costs. They often come with high costs and high-interest rates, which can be difficult to pay back.
- Repayment Inflexibility. Repayment terms may be inflexible and require a set percentage to be paid daily, which may be difficult to manage on lower revenue days.
- Unpredictable Cash Flow. Merchant cash advances are based on future sales, so you may be unable to predict how much money you’ll have to repay at any given time.
- Limited Availability. They are only available to businesses with a certain annual revenue, so if you don’t meet those requirements, you may not qualify.
- Personal Liability. If you take out a merchant cash advance with personal guarantees, you could be held personally liable if you default on the loan.
- Short Repayment Periods. They have short repayment periods, which can put extra pressure on companies that are already hurting for positive cash flow.
Best Merchant Cash Advance Lenders
Credibly: For the Lowest Rates
A business cash advance from Credibly can provide businesses with up to $100,000 in as little as 48 hours without needing a personal guarantee or collateral.
Credibly also ensures you don’t overpay for their services by offering competitive APRs ranging from 15% to 40%.
This allows more funds to be used to help your business grow! Plus, they have helpful customer service representatives who will guide you through the entire cash advance process.
Kabbage: For Smaller Companies
Kabbage is a fintech company owned by American Express. It stands out because its monthly income requirements are relatively low.
While some MCA providers require $20,000 or more in monthly income to offer to finance, Kabbage only requires $3,000. This makes it an ideal alternative for small business owners who would not otherwise have access to this type of financing.
Fora Financial: For Large Loan Amounts
Businesses seeking merchant cash advances in exceptionally large amounts may have limited options.
Most Fora Financial advances come with flexible financing amounts, up to $500,000, so businesses can get exactly what they need when they need it.
The exact terms vary depending on specific circumstances but generally involve interest rates between 10% and 30%.
Stripe Capital: For Companies with Recurring Revenue
If your business has recurring revenue with an online payment processor, you can get the best rates and fastest service from the payment processing company.
Stripe Capital offers merchant cash advances from $1,000 up to $250,000 with no additional collateral required.
Interest rates range from 1% to 2% per week, depending on your company’s specific qualifications and risk factors. The repayment duration varies between 6 months and 2 years, depending on the performance of your business and income projections.
Reliant Funding: For Fastest Funding
Reliant Funding offers this financing with competitive rates and flexible payment terms. With them, you can quickly obtain the funds you need when it best suits your company’s needs.
You must submit basic business information and meet certain eligibility requirements, be in business for at least twelve months, and process at least $5,000 a month in sales volume on platforms like Square or PayPal.
How to Apply for a Merchant Cash Advance
Before you apply for a merchant cash advance, it is important to understand the requirements and the process. Here are the steps to take:
- Gather the required documents. The documents required will vary depending on the lender. Generally, you will need to provide financial statements, a copy of your business license, and proof of your business’s credit card sales.
- Submit your application. Once you have gathered the required documents, you can submit your application to the lender. This process can be done online or in person.
- Receive a decision. The lender will review your application and make a decision. If approved, you will receive an offer with the advance details.
- Review the offer. You should carefully review the offer and ensure you understand all the terms and conditions.
- Sign the agreement. Once satisfied with the terms, you can sign the agreement and receive the cash advance.
Best Uses for Merchant Cash Advances
Here are some of the most common uses for a merchant cash advance:
Many small businesses use MCAs to cover short-term expenses such as payroll, inventory, rent, and other operating costs. MCAs provide the needed capital quickly and without the hassle of a lengthy loan application process.
If you know your company is stable and simply needs a quick injection of funds to keep providing products and services, a merchant cash advance could be right for you.
Businesses looking to expand their operations often turn to MCAs. This financing allows them to access the capital they need to expand faster and with less hassle than a traditional loan.
If you are looking to open a new location, launch a new marketing campaign, or hire more salespeople to grow your operations, a merchant cash advance could help fund your vision.
If your business needs to purchase new machinery, equipment, or software, a merchant cash advance can help cover the costs.
This type of financing is ideal for businesses that need to upgrade their equipment quickly and without a long-term loan commitment.
Unexpected emergencies can put a serious strain on a business’s finances. A merchant cash advance can provide the necessary funds quickly and with minimal paperwork.
If your business endures a problem, such as a water leak, a large order rejection, or an unusually slow month, a merchant cash advance could help keep the lights on until brighter days arrive.
Businesses often use merchant cash advances to pay their taxes. This type of financing is ideal for businesses that need to make large tax payments quickly but lack the funds to do so.
While planning and saving for taxes is the ideal approach, real life is not always so neat.
If you find yourself in this unfortunate situation, you might decide that the cost associated with an MCA is preferable to the negative consequences of making a late tax payment.
Alternatives to Merchant Cash Advances
Small Business Loans
They provide larger sums of money at a fixed rate and with a regular repayment schedule.
These loans generally require collateral and a credit history of at least 680 for consideration. They usually have longer repayment terms, but the rates are generally higher than other small business financing options.
Working Capital Loans
Working capital loans provide a lump sum with a fixed repayment schedule and interest rate. This option can help a business cover rent, payroll, and inventory expenses.
Line of Credit
A line of credit is similar to a loan in that it provides business capital but differs in that the borrower has access to a maximum amount of money they can use when needed.
The borrower only pays interest on the money borrowed, and there is no fixed repayment schedule.
Invoice factoring is a form of business financing that involves selling unpaid invoices at a discounted rate to receive immediate cash flow.
This option is ideal for businesses that rely heavily on accounts receivable income, such as those in the construction or transportation industry.
Find the Best Financing for Your Business
A merchant cash advance can be a great option for small businesses. Their process is simple and fast, with funds deposited into your trading account within a few days. In the same way, the payment process is flexible and adapts to your company’s cash flow.
However, remember that small business loans can help you find the money you need.
Camino Financial offers small business loans with no hidden fees and fixed terms that could suit your unique situation.
Our financial solutions can need help your small business thrive and grow.
Is a merchant cash advance ideal for small businesses?
A merchant cash advance is a great option for small businesses. The process is simple and fast, with funds deposited into your business account within a few days. Additionally, the repayment process is flexible and tailored to your business’s cash flow.
What happens if you default on a merchant cash advance?
If you default on a merchant cash advance, the lender has the right to take legal action against you. This could include filing a lawsuit or garnishing your wages.
Additionally, the lender may sell the debt to a collections agency, which could impact your business credit profile.
Is merchant cash advance a loan?
A merchant cash advance is not technically a loan, but it functions in a very similar way. With a merchant cash advance, you borrow money from a company for a percentage of your future credit card sales.
Is merchant cash advance legal?
Yes, a merchant cash advance is legal. This is a type of financing where a business can receive an immediate lump sum of cash in exchange for a percentage of their future credit card sales.
This type of financing has become increasingly popular in recent years as businesses have struggled to secure traditional forms of financing, such as bank loans.
How to get out of a merchant cash advance?
There are a few ways to get out of a merchant cash advance. The most common way is to pay off the advance in full. Another way is to negotiate a settlement with the lender. This usually involves paying back a percentage of the advance plus fees.
Finally, you could try to file for bankruptcy protection. However, this option is only available if you have already defaulted on the advance.
Where can I get a cash advance?
Merchant cash advance companies provide short-term loans to businesses in exchange for a percentage of their future credit card sales.
They easily get cash quickly, and many don’t require a credit check. However, the interest rates can be high, so shopping around for the best deal is important.
Do merchant cash advances report to business credit bureaus?
No, merchant cash advances do not typically report to credit bureaus, such as Experian or TransUnion.
A merchant cash advance is an alternative to traditional financing sources and is a lump sum of capital provided in exchange for a portion of the business’s future revenues.