With a Merchant Cash Advance (or MCA for short) a lender will buy a piece of your business’ future revenues. You’ll receive the cash advance as a lump sum payment and then make payments from your merchant account that fluctuate along with your daily revenue.
In reality, an MCA is not a merchant loan, it is an advance on your future revenues. You would not have to pay it back if you went out of business.
Payments are automatically deducted from revenues generated on your merchant account every day until the advance is paid off.
Perhaps the quickest form of small business financing, getting approved for a merchant cash advance is relatively easy. They are simply buying a piece of the company’s future revenues. Most merchant cash advance companies require merchant processing statements and bank statements to determine not only if you qualify, but also how much you qualify for. Some companies may also require a personal credit check.
After your business information has been submitted, the decision will be made regarding how much they are willing to offer and what kind of terms you get on the advanced business capital.
Once approved, the merchant advance funds are deposited into your bank account so you have the working capital you need to continue growing your business.
When it comes to methods of repayment, you have three options:
With a split withholding merchant cash advance, payments are automatically deducted from your merchant account and transferred to the MCA provider by your credit card processor.
In this scenario, all credit card sales are deposited into a bank account controlled by the finance company who then transfers the funds back to the business account, less the payment owed.
The ACH withholding repayment plan is an automatic debit from the business checking account.
You also have two options regarding the way merchant cash advance repayments are structured:
The predetermined percentage of sales is an estimate based on your projected monthly revenue. With fluctuating sales, you can expect your payment to change correspondingly. This can mean a longer repayment period than expected for many purchasers.
This kind of agreement stipulates a daily or weekly payment based on an estimate of your monthly revenue. Unlike the repayment structure tried to credit card and debit card sales, your payment is the same every month regardless of sales volume.
As with any form of financing, the main cost you will pay is interest (referred to here as a factor rate.)
Let’s take a look at an example…
If you take out an advance of $30,000 with a factor rate of 1.2, you would repay $36,000. Your total interest costs would be $6,000 for this particular advance.
This might not seem like a bad deal, but you need to take into consideration your annual percentage rate (APR). This is the effective rate of what you are paying when you take the interest, time and payments into consideration.
In addition to paying back your factor there may be other fees such as origination. Be sure to ask your lender to help you understand all the fees they charge before signing up for a merchant cash advance.
APR is the best indicator of whether you’re getting a good deal on your business finance advance. Considering that a small business cash advance is one of the most expensive sources of capital, make sure you know exactly what interest rate you’re paying for the privilege.
It doesn’t matter whether you’re comparing the merchant advance with a personal loan or other types of traditional financing. You can’t make an accurate loan comparison without calculating APR.
Once you know the lump sum that you will receive as a cash advance and how much you have to pay back, you can use an APR calculator to determine what your APR is. Different terms and payback periods will also impact your APR.
*Make sure that you use a merchant cash advance calculator and not a mortgage or credit card APR calculator as the interest is charged differently.
Every advance is different, however, most are paid off within three to twelve months. If you elect to pay back the advance as a percentage of your sales, you will not be able to determine an exact timeframe for paying off your advance as your payments fluctuate.
If you end up with higher credit card transaction revenues than you anticipated when you took out the advance, then it will be paid off faster. Likewise, if your sales go down, the it will take longer for you to pay off your balance.
In most cases, it’s better to pay off a business loan as quickly as possible. With a merchant cash advance, however, there is no advantage to early repayment. In fact, the APR drops the longer you are making repayments because the effective cost of access to merchant capital is reduced over time.
If you need the cash for your business quickly and don’t have time to mess with the paperwork of getting merchant loans then an MCA is probably worth a look. Simply submit your merchant processing reports (and possibly some bank statements) and you will be presented an offer. With a merchant cash advance, funds can be in your account in a matter of days, not weeks.
A merchant cash advance is unsecured, meaning the money is not tied to an asset. If sales plunge and you fail to repay, you and your business will not be on the hook. However, some providers may require a personal guarantee in the MCA contract; in this case you would be personally responsible for repaying the funds.
MCA repayment plans allow variable payments based on your volume of credit card sales. This can come in handy for companies whose sales vary seasonally, and ensures you’ll always have enough cash on hand to make your payment.
This can be a huge factor for struggling small businesses. Merchant service cash advances provide a lump sum of money in exchange for the promise of future sales, so advances can be approved with little consideration of credit rating.
For all it’s advantages, MCA is one of the priciest ways to get funds for your business: APRs can be as high as 350%! Compare this to a credit card at 13.12 – 19.87% APR, or an SBA loan at 4 – 10% and you can see how the costs of the merchant cash advance can quickly add up.
High sales are a good thing, right? Right, but when calculating the effective cost of financing, the longer you get to hold onto the funds, the more valuable they are to you. Considering that higher sales will lead to higher payments and higher payments will result in quicker repayment of your advance… All this adds up to a higher APR for you.
Because they are an expensive form of capital and they take payment every day you can find your business stuck in a cycle where you have to have a cash advance at all times.
Merchant cash advances are not technically considered loan products in the eyes of the law because they are buying your future revenues. Instead they are regulated at the state level Uniform Commercial Code.
Some companies in the merchant cash advance industry can be deceptive and similar to payday loan companies. The Small Business Finance Association is a group of alternative lenders trying to increase transparency in the industry. They recently came out with new best practices guidelines, so ask your MCA provider if they are working within these guidelines.
By the way, if you are trying to build business credit an MCA will not help you. Since it is technically not a loan it is not reported to the business credit agencies.
An MCA should only be used for short-term financing, and should not be considered a long-term solution for chronic cash-flow issues.
If you can’t qualify for a traditional loan or an alternative loan product, it may be worth biting the bullet and accepting the higher APR associated with a merchant cash advance.
The variable payments available with MCAs may be attractive for you if a fixed payment sounds too risky. Your merchant cash advance can help with inventory purchases, debt payments, working capital, and unexpected expenses.
In order to borrow against future credit card transactions, you’ll need to already be processing credit cards– makes sense, right? In addition, the merchant cash advance option really only makes sense for those businesses that generate most of their revenue from credit card transactions.
In most cases you’ll need to have already been in business for at least 1 year to take advantage of a merchant cash advance.
The nice thing about merchant cash advance financing is that most businesses will qualify. This is because this type of capital for merchants requires no collateral and no down payment.
Most companies in the merchant cash advance industry don’t even look at profitability. As long as you can prove you generate enough card sales to cover the monthly payments, you can easily qualify.
While every MCA business has different requirements on their advances, most will have some minimum requirements around the following factors: months in business, monthly revenues, and credit card or debit card sales.
Getting a good deal on a merchant cash advance has more to do with the lender you choose than anything else. In an industry riddled with predatory lending and lacking regulation of cash advance products like MCAs, a little research goes a long way. Let consumer reviews of MCA lenders be your guide in choosing who to do business with.
In order to expedite the process, you should have certain documents ready before applying for merchant cash advance financing. Here’s what you’ll need to apply for an MCA:
|Loan Type||Loan Amount||Loan Cost||Loan Terms||Time to Funding|
|Merchant Cash Advance||$2,500 - $250,000||1.14 - 1.18 factor rate||Deducted daily from merchant account||As little as 7 days|
|Invoice Financing||50 - 90% of total invoices outstanding||About 3% + %/week outstanding||When customer pays invoice, you receive remaining 10 -50% (minus factor fee)||As little as 24 hours|
|Short-Term Business Loan||$2,500 - $250,000||14% APR and up||3 - 18 months||As little as 48 hours|