Merchant Cash Advance

What Is a Merchant Cash Advance? (All You Need To Know)

Gerri Detweiler • April 12, 2022

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What Is a Merchant Cash Advance (MCA)?

A merchant cash advance is not technically a business loan but instead offers an advance against future sales, based on past debit and credit card sales. 

The funding provider gets paid back by automatically taking a portion of future credit card sales, usually each business day. Qualified business owners can usually get approved in a day or two, with very little paperwork. 

Merchant cash advances provide small businesses with an alternative to other types of small business loans that may be harder to get, such business lines of credit or traditional bank loans. Business owners receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance from future sales. An MCA can be a funding option for businesses that have high credit card sales volume, need funding quickly, and may not qualify for other small business loans.

But you’ll likely pay for this convenience with costs that are higher than traditional small business loans. Here we’ll explain what you need to know if you’re considering this small business financing option

Where to Get a Merchant Cash Advance

A number of companies offering merchant cash advances. Here are a couple of popular options: 

Credibly

Credibly offers $5,000 - $400,000 to small businesses with at least six months in operation, $15,000 in monthly revenue and a minimum 500 credit score (with a soft credit pull). If approved, funding is fast: As quickly as 1 business day Repayment terms: Daily debits from your bank account for 3 to 18 months.

Rapid Finance

Rapid Finance offers merchant cash advances of up to $5,000-$600,000 in 1-3 days.  Payments are variable, depending on future receivables, over 4 - 12 months.

Fundbox

Fundbox doesn’t offer merchant cash advances, but their lines of credit may be a great alternative for borrowers with less than perfect credit. Merchant cash advances traditionally have lower approval thresholds, and Fundbox’s line of credit falls right in line. Borrowers can qualify with a personal credit score of just 600. 

How Does a Merchant Cash Advance Work?

When a small business most needs funding, it can seem hard to get it. Traditional lenders like banks often have long approval processes, and ideal business credit cards may require good to excellent credit.

This is one of the advantages of a merchant cash advance. A merchant cash advance reviews the past debit card and credit card sales of the business and uses that to provide an advance against future sales. Funding is often very fast. 

If approved, payments will often be taken out of your merchant account or bank account via a daily (or sometimes weekly) direct debit. Some MCAs will base the payment on how much your business receives in sales. When sales are lower, you pay less. This can be helpful for cash flow. 

Make sure you consider the consistency of your cash flow and whether or not you’ll have the appropriate cash in your merchant account each day to support the periodic payment.

What You Need to Know About Merchant Cash Advances

Merchant Cash Advance Pros

The hallmark benefit of merchant cash advances is fast access to cash. Many issuers can get you funding in a lump sum within 48-72 hours. Personal and business credit scores may not be a hurdle as it can be with other loans.

They also don’t require high personal or business credit scores, instead putting more weight on credit card and non-invoice sales numbers. Issuers also place little to no stipulations on how the cash is to be used, meaning you have more freedom to use the advance on what you need without any extra hands steering the ship. You won’t need to put up any collateral (other than your future credit card receipts), and providers may offer somewhat flexible repayment terms. 

Merchant Cash Advance Cons

Merchant cash advances can be very expensive. A low factor rate can be comparable to a 35% APR, and if you get a high factor rate, you can pay up to the equivalent of 350% APR (or more).

And, because they are not loans and don’t report your payment history to the business credit bureaus, they won’t help you build business credit. With daily payments standard, merchant cash advances can quickly become a cash flow burden if not managed properly.

Merchant Cash Advance Terms and Features

Getting a merchant cash advance is quick and easy, and filling out the application can take very little time. In fact, you may be able to get approval the same day you apply and receive your funding a day or two after that.

With quick approval turnarounds, you can access cash much quicker than with other means of financing, including short-term loans or long-term loans. Plus, merchant cash advances don’t usually require good business credit or collateral, unlike traditional business loans. The MCA is based on your business’s cash flow and not your business history or credit score. 

Each merchant cash advance will have the following features:

• Advance amount. The principal amount advanced can range from $2,500 to $1 million, but most MCAs will fall between $5,000 and $500,000. 
• Factor rate. This describes the rate charged, and can be as low as 1.09, and can go as high as 1.5 or higher principal amounts. 
• Payment frequency. MCAs don’t offer monthly payments. Instead payments are made on a daily or weekly basis, and are made automatically, often as a percentage of sales. 
• Repayment period. Because payments are often based on sales, there is unlikely to be a set repayment period. However, this is short-term financing that must be paid back in three months to two years.

Keep in mind that while MCAs are quick and easy to get, the high cost may not make them the right decision for your business. You can pay up to 50% of the amount of your principal, and the payment amount won’t change over time, as they would with a traditional loan. In addition, you may be penalized for paying the MCA back early with a higher APR. 

When to Use Merchant Cash Advances

Merchant cash advances are extremely flexible, especially in the amount of money you can get and how you pay it back. Because a qualifying business owner can usually access an MCA quickly it can be an option for a business owner who needs fast cash to cover some of the following uses cases:

• Temporary cash flow help. If you’ve had an unexpected downturn in your cash flow for any reason and you need help covering payroll, utility bills, or your lease, a MCA may be a quick and easy solution. 
• Purchasing inventory at a deep discount. Many small businesses that deal with inventory, such as retail, restaurant or e-commerce businesses, may want to purchase supplies when they can get significant discounts. This can be particularly helpful when supply chains are strained. 
• Unplanned expenses. If an important piece of equipment has broken or another emergency arises, you can use a MCA to cover the cost quickly. 
• Working capital. Getting an MCA may be helpful for short-term working capital needs.

If you have the cash flow and credit card receipts to support the typical daily debit from your merchant account, an MCA may allow you to get in and out of financing quickly. However it should be considered a short-term financing solution due to the cost.

How to Apply for a Merchant Cash Advance

Qualifying may be the easiest part of getting a merchant cash advance. Unlike traditional small business loans, applicants don’t need to have 2-3 years in business to qualify. The amount and number of your credit card payments are more important than a business’ credit profile. Eligibility is often more flexible than traditional lenders, and solid sales numbers can help a business with poor credit qualify for a merchant cash advance. 

Most providers offer online applications, making the already quick process even more convenient for business owners.

You will often need to provide:

• 3-6 months business bank account statements
• Merchant account or credit card processing account statements 
• Basic information about your business

The cash advance provider may check personal or business credit, but again, information from your bank statements and/or merchant account will carry the most weight. Keep in mind that good credit may help you qualify for better terms.

Merchant Cash Advance Repayments

Because an MCA is not a loan and is really an advance based upon your credit card volume, the way you repay the advance and the fees you pay might feel unfamiliar with what you are accustomed to.

Most MCA providers debit money from your daily credit card transactions to repay the MCA (though some providers allow for weekly debits instead). If your MCA requires daily debits, there is generally no grace period. You should expect to start making daily payments the day following disbursement of funds. 

Additionally, there may be a new term or two you should become familiar with. In addition to terms like periodic payment, daily debit, and payback period, there is something called a holdback. Holdback refers to the percentage of your daily credit card transactions that are debited from your account every day. The holdback percentage is usually between 10% and 20% of your daily receipts and remains fixed until the advance is paid in full.

Merchant Cash Advance Rates And Fees

Business owners often confuse the holdback with the rate you will pay for the advance. If you want to understand the cost of an MCA, the factor rate is key to evaluating it. Most MCAs, when they express the cost, do not use an Annual Percentage Rate (APR) but instead use a factor rate. Think of it as more of a calculation rather than an interest rate percentage.

For example, if you are quoted a factor rate of 1.5, that means that for every dollar you get advanced, you will pay back $1.50 (or $.50 per dollar). In other words, if you get an advance amount of $10,000 at a factor rate of 1.5, you will pay $5,000 back to the MCA provider as your cost of the capital.

$10,000 x 1.5 =$15,000

In this example, if the holdback percentage was 15% and $5,000 was deposited into your merchant account for today, the holdback would be $750. 15% of $5,000 is $750. If, instead, you received $8,000 in your account tomorrow, the holdback amount would be $1,200 since 15% of $8,000 is $1,200.

Your holdback amount will vary depending on the credit card receipts in your merchant account. In other words, when you have a big day with a lot of credit card receipts, your periodic payment (based on the holdback) will be larger than slower days with fewer credit card sales.

Because your periodic payments will likely be daily, you’ll want to confirm whether or not those daily payments will be debited only on business days — or will they also include weekends? And, as mentioned earlier, know whether you’ll have weekly or daily debits so you can control cash flow effectively. Daily debits can be frustrating for a business owner not expecting the first payment to be due so quickly.

How a Merchant Cash Advance Can Benefit Your Business

Although the costs associated with a merchant cash advance (MCA) are typically higher than a traditional loan at the bank, they offer some key benefits:

• The application process is generally quick and easy
• You’ll get an answer fast and have access to capital quickly if approved
• You don’t need exceptional credit to qualify

An MCA can be a good option if your business has an opportunity to increase ROI on a project but needs to respond quickly with additional capital.

A merchant cash advance can be a tool to access capital quickly, but it can also put a business in cash flow jeopardy if you’re not careful. Although there are a number of factors that make an MCA attractive to a business with a weak credit profile, some businesses use this type of financing to augment a short-term cash flow crunch. A good use for a merchant cash advance is to fund a short-term opportunity to generate additional ROI on a project — like the purchase of quick-turnaround inventory.

The businesses most successful at leveraging an MCA are those that use funds to augment some kind of ROI-generating activity, are very mindful of the costs, and understand those costs in relation to the potential ROI gain. If that describes you, a merchant cash advance could be a good option for your business.

However, because this option is more expensive than some other options, it can become very expensive if you’re looking for money to bail you out of a financial bind. You don’t want to get in the habit of relying on merchant cash advances since its higher cost can make it very difficult to manage future cash flow.

The Latest Changes in the Merchant Cash Advances Market 

The MCA industry is poised for growth. It is expected to grow globally to $26.3 billion annually by the year 2029, according to the Merchant Cash Advance Market report by Adroit Market Research. 

Growth is fueled by benefits such as fast funding and online applications, as well as working capital challenges faced by small businesses. Improvements in technology allow providers to quickly review credit applications and provide funding in hours or days.

Alternatives to Merchant Cash Advances

A merchant cash advance is simply one of several business funding options available to small business borrowers — even with a less-than-perfect credit profile. Here are some of those other options:

Online small business loans

Many online lenders offer both short- and long-term business loans that can meet the needs of a small business. Each online business loan program will have different eligibility requirements. The goal is to find a loans that meets your business needs, and is also a match with your profile.

Business cash advance

Different from a merchant cash advance in that it is based on your cash flow, the business cash advance often has a fixed payment (still potentially daily or weekly depending on the lender), and may offer somewhat lower costs than a typical merchant cash advance.

Factoring

Factoring is not a small business loan either. Instead the business sells outstanding invoices at a discount. It provides cash now rather than waiting for your customers to pay their invoices, and it is a viable way to access short-term capital (provided your customers pay by invoice).

Accounts receivable financing

Unlike factoring, AR financing is a loan secured by the value of your receivables. The lender will typically report your loan payment history to the appropriate business credit bureaus, meaning your good credit practices will help improve your business credit profile in addition to providing you with access to borrowed capital.

Business credit cards

Most business credit cards offer a line of credit you can use for short-term financing. Minimum payments are often low, but interest rates can be high, though not as high as some MCAs. A few business credit cards feature 0% intro APRs, which can make them an affordable option if you need to borrow funds for a short period of time.

Nav’s Verdict: Merchant Cash Advance

If you don’t qualify for other financing because of less-than-perfect credit, or other qualifying factors, merchant cash advances can help. But you should be cautious and have a plan for how this funding will increase revenues more than the cost. This type of financing should be used for short-term needs when other financing isn’t available.

Frequently Asked Questions About Merchant Cash Advances

• Can I Get a Merchant Cash Advance With Bad Credit?

  A merchant cash advance provider is typically most interested in the amount of credit card transactions your business processes each day, so they are often willing to work with businesses that have a less-than-perfect credit profile. They will typically require direct debit access to your merchant account and some providers may even require your business to use their hardware to process your credit cards.

• How Can I Get Out of My Merchant Cash Advance?

  If you opted for an MCA because of a weak credit profile and it becomes apparent that the cash flow burden of servicing the advance becomes a cash flow burden your business can’t support, the only real option is to refinance the obligation with a lower-interest loan of some kind. Unfortunately, if you had a weak credit profile before the MCA, qualifying for a small business loan could still be a challenge.
  
  Applying for another MCA to pay off the first can get expensive really fast and might not be the best way to reduce the obligation of the first. Speaking of multiple MCAs, the practice of stacking MCAs one on top of each other can get expensive really fast and is not refinancing nor is it generally recommended.
  
  The most cost-effective way to refinance a merchant cash advance is with a conventional small business loan. Interest rates are usually much less than a cash advance and often include more favorable terms, if you qualify. Maintaining a personal credit score above 650 (the minimum threshold to apply for a loan with the SBA) and a good business credit history will be required to qualify for a conventional loan. Most traditional banks have a minimum personal credit threshold of 680.
  
  Other options could include asset-based loans. An asset-based loan allows a business owner to capitalize on assets like Accounts Receivables, inventory, or real estate to secure financing. An asset-based loan will be more expensive than a traditional small business loan (though usually less than an MCA), but will be easier to qualify for in a less-than-perfect personal and business credit situation.
  
  Depending on the asset, an asset-based loan could be treated as a revolving credit line or a more traditionally amortized loan.

• What Happens if You Default on a Merchant Cash Advance?

  It probably goes without saying, but defaulting on a merchant cash advance should be avoided. Although most providers no longer require personal guarantees, there is often a performance guarantee included in the contract. Defaulting may result in damage to your business credit, collections, and/or legal action.

• How To Calculate Merchant Cash Advance Rate

  Merchant cash advance providers typically list cost as a factor rate, rather than an interest rate or APR. You can multiply the factor rate by the amount of the advance to determine how much you’ll have to pay back. (There may be fees in addition to the factor rate, so it may not represent total cost.) These business loan calculators can also help you understand the cost of a merchant cash advance.

• Average Cost Of A Merchant Cash Advance

  The cost of merchant cash advances vary depending on the provider and the qualifications of the small business. It can be challenging for business owners to compare costs with other types of financing since the cost is not expressed as an interest rate or APR. Don’t be afraid to talk with your financial advisor or accountant if you need help understanding the cost of financing you’re considering.

• Is a Merchant Cash Advance a Good Idea?

  If you don’t have the creditworthiness for a more traditional bank loan and can afford the payments, a merchant cash advance can help your business grow. While MCAs provide quick access to capital for businesses with fluctuating cash flow, they often come with higher costs and may not be subject to the same regulations as traditional loans, making them a more expensive financing option.

• Is a Merchant Cash Advance a Loan?

  No, a merchant cash advance isn’t a traditional loan. Instead, it’s a financial arrangement in which a business receives a lump sum of cash upfront in exchange for a percentage of its daily credit card sales and a predetermined fee. Unlike loans, MCAs don’t have fixed interest rates or repayment schedules. Instead, repayments are made daily as a percentage of the business’s daily credit card transactions until the agreed-upon amount, including fees, is repaid.

• What Percentage Does a Merchant Cash Advance Take?

  Merchant cash advances charge a factor rate, and a typical factor rate can be compared to around a 35% APR. The exact fee depends on the specific advance.

• Would a Business Charge Card Be Better Than a Merchant Cash Advance?

  A business charge card can be a more cost-effective and flexible option for managing day-to-day expenses and building credit, especially if the business can pay off the balance monthly to avoid interest charges. On the other hand, an MCA provides quick access to capital but can be significantly more expensive due to the high fees and daily repayment structure.

• Can a Merchant Cash Advance Hurt Your Credit?

  A merchant cash advance usually doesn’t report payments to credit bureaus, so you typically don’t have to worry about missed payments hurting your credit score. However, defaulting on an MCA will bring hefty fees, so it’s best to avoid.