Merchant Cash Advance

A merchant cash advance, also known as an MCA, is an alternative option to a small business loan. An MCA is an agreement made with an alternative financing company or online lender that offers a small business an upfront sum of cash. Essentially, a business will sell a portion of their sales to a lender. This is repaid by using a percentage of the business’s debit and credit card sales.  

How MCAs work 

A merchant cash advance is not a loan, but an advance on your future sales – plus fees. Repayments are structured in one of two ways, either from a percentage of your debit/credit card sales or from fixed withdrawals from a bank account. Traditionally, an alternative financing company would deduct a daily or weekly percentage of your sales until the total of the advance has been repaid. The repayment terms for this option depend on your sales and the alternative finance company. It may range from three to 18 months, but it is dependent on how high your credit card sales are. The higher your sales are, the faster you will be able to repay the advance.

On the other hand, if your business is experiencing a slow month, your payment amount will be lower. With a fixed withdrawal from a bank account, payments are made daily or weekly, and the amount is dependent on your monthly revenue. Businesses that do not rely on debit/credit card sales may find this option more suitable. Both options automatically deduct payments, relieving you from the stress of making payments or experiencing late payments.

MCA Rates and Fees 

Merchant cash advance providers charge factor rates instead of traditional interest rates. These factor rates can range anywhere from 1.1 to 1.5 and apply only to the original amount borrowed. The alternative financing company multiplies this rate by the advance amount, resulting in your total loan obligation. If a lender offers you a merchant cash advance of $50,000 and a factor rate of 1.2, then the total you will pay back would be $60,000 (50,000 x 1.2). This rate will vary on the provider’s evaluation of your business which will most likely depend on your credit score, debit/credit card transactions, financials, and years your business has been operating. 

MCA Application Process 

The application process for a merchant cash advance is rather simple. A business may apply for an MCA online, with an alternative financing company. Usually, the application requires minimal documentation and offers approval within hours, and funding may be available to you within 24-48 hours. 

Merchant Cash Advance Qualifications 

Most alternative lenders have flexible requirements, and work with businesses that may not have the best credit history. Credit is not a huge factor in the approval process, but it may influence the amount of advance provided. Lenders do consider the amount of time in business along with future potential growth. Most require you to have been in business for at least 3 months and will review the deposits you have made over that time. Other factors merchant cash advance providers may consider any history of overdraft fees and/or negative balances.