A merchant cash advance or “MCA”, is one of the most popular financing options for small business credit. Technically, an MCA is not a loan and has very different rules compared to conventional small business loans. A merchant cash advance is a business transaction where a lender agrees to purchase future revenue (usually from credit card or debit card sales) from the business owner.
MCA’s should be used sparingly and only when all other financing means have been exhausted. This is because a merchant cash advance is generally one of the most expensive forms of small business financing. However, for some companies an MCA is one of the only alternatives for small businesses owners seeking funding for working capital.
 According to a report from the National Academy of Sciences, many small businesses have encountered severe financial hardship as a result of the pandemic from 2020. As the effects of the pandemic on small businesses are projected to linger into 2023, small business will continue to face strong headwinds in acquiring working capital. Bank lending has slowed to a trickle and those institutions have very strict lending requirements that most small businesses cannot meet. So, how does your business overcome such ordeals?
Small businesses will need to get creative and be prepared to seek alternative lenders or sources of funding for working capital. Luckily, there’s a way in which you can turn your future credit sales into today’s cash flow. Merchant cash advance lenders can help stabilize your business finances.
In businesses that have a high volume of credit card sales, such as restaurants, a merchant cash advance makes most sense as opposed to a conventional restaurant business loan. Remember, merchant cash advances are paid back from a percentage of future credit card sales. Because restaurants anticipate a higher and consistent cash flow from credit card sales they are more likely to use this type of financing.
What Is a Merchant Cash Advance?
Traditionally, a merchant cash advance (MCA) provided quick business capital based on upcoming credit card or debit card sales. However, this type of business funding can apply to most any payment type, not just card sales. That said, the majority of MCA financing is made to companies that do a significant amount of their sales via credit card transactions or debit cards.
Unlike traditional loans, cash advance companies offer your business a lump-sum, upfront cash payment in exchange for a portion of future revenue receivables. The cost of the cash advance is almost always expressed as a defined payback figure with an equally well-defined repayment schedule; unlike a loan which charges an interest rate on the amount borrowed. Repayment amounts are generally drawn from your credit card sales merchant account daily or weekly as defined in your MCA agreement.
For example, let’s say you need an advance amount of $50,000 to expand your business. The MCA provider will give you a figure (sometimes referred to as a factor rate) that will define your payback amount. Let’s say that figure is 1.3. To arrive at your payback amount using the Factor Rate multiply the amount borrowed ($50,000) times the factor rate (1.3) and the result is the amount you will be required to bay back (65,000).
MCA Factor Rate Example:
Amount of Advance
Factor rate
Payback Amount
$50,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x
1.3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â =
$65,000
How to Apply for Cash Advance
The application process and approval process is relatively simple compared to conventional loans however, there are usually higher costs associated with an MCA.
In most cases you will need to provide documentation from your credit card merchant accounts (usually several years of past statements) to give the MCA provider a solid record of sales activity. In addition, you will likely be asked to provide past bank statements for the same multi-year period. Finally, you will need to verify how long your company has been in business.
In most cases, the MCA provider will not require a credit check, since the transaction is based on future credit card receipts. Also, most MCA providers do not require a personal guarantee from the borrower. Unlike traditional business loans, a merchant advance is based on the businesses revenue history and future sales revenue or in some cases accounts receivable.
There may be other requirements from certain providers not covered here, but the three things mentioned here will likely determine your eligibility.
Applying Online
Companies such as New York-based ICapital Funding allow applicants to apply online. Many of the other providers will allow you to start your application online these days. If you have the documentation mentioned above, you can usually get a decision on your loan and amount in just a few hours. Once you have received an online confirmation of your eligibility, it is common for a representative of the company to contact you to review your payback amounts and other terms of the cash advance.
Review Terms of the Agreement Carefully
It is very important before you accept your cash advance to read the terms of your agreement very carefully. A merchant cash advance may seem like easy money, but it’s one of the most expensive ways to acquire working capital and is suitable for businesses that anticipate steady or growing sales.
If you do not understand your agreement, do not sign it until you seek advice or can understand costs and repayment terms.
How Long Does It Take to Get Money From an MCA?
In most cases providers can process the application and disburse funds to your bank account the same day you apply. The time to funding will depend on the completeness of the documentation you provide to the MCA issuer.
Why Merchant Cash Advance Loans?
We’ve discussed the costs and the process of repaying an MCA. Again, read the terms of your agreement carefully and understand the costs. MCA loans can be among the most expensive methods of financing you company.
Once you understand the costs and terms, let’s consider why a business would want MCA funding. Merchant cash advance providers can provide a financial lifeline to your struggling company. In many cases an MCA is the last resort for a business experiencing shortage of cashflow or one that experiences an immediate and unforeseen need for capital. As we mentioned in the outset of this article, most small businesses simply do not qualify for a traditional bank loan.
Some of the Benefits of a Merchant Cash Advance are Outlined Below:
Fast Application, Processing, and Funding
If you need urgent business funds, MCAs are usually processed in less than a day. Funds may reach your business account in three days, depending on the bank you use.
Less Stringent Qualifications
Merchant cash advance companies are only interested in the daily sales or monthly revenue your business makes. Credit scores rarely influence their funding approvals.
No Collateral
MCAs are unsecured. You don’t have to use your assets to secure business funds.
Flexible Payments
The paybacks are calculated based on your credit card sales. In most cases you don’t have to worry about missing a repayment deadline since there’s no fixed payment period.
Fits Any Business Use
Once you get a business cash advance, you can use it to cover any business expense. The best use for these funds is to offset short-term operating costs like restocking. You can still use this cash to buy equipment, make payroll, expand your business, and meet other company needs.
Downsides to Getting a Merchant Cash Advance
The biggest downside to an MCA is the cost of capital. We mentioned at the outset that a merchant cash advance is one of the most expensive ways to finance your business. It’s worth repeating that you might want to explore all other financing options before you settle on a merchant cash advance.
FAQs
Who Can Apply for a Merchant Cash Advance?
A merchant cash advance is available to small businesses that have a history of consistent revenue of several years. At a minimum MCA providers look for one year of operating history. For this reason, an MCA is not a viable alternative for startups.
What are the Requirements for Cash Advance?
When applying for a cash advance online, you need:Â
A signed application
Credit card account statements
A business bank account
Business bank statements (last three months)
Is a Merchant Cash Advance a Loan?
MCAs are technically not loans. You repay MCAs as a percentage of your daily credit sales plus a predetermined fee.
Do Cash Advances Affect My Credit Scores?
In most cases an MCA does not result in a personal credit inquiry. So, taking a merchant cash advance (in most cases) won’t hurt or build your credit score.
A merchant cash advance or “MCA”, is one of the most popular financing options for small business credit. Technically, an MCA is not a loan and has very different rules compared to conventional small business loans. A merchant cash advance is a business transaction where a lender agrees to purchase future revenue (usually from credit card or debit card sales) from the business owner.
MCA’s should be used sparingly and only when all other financing means have been exhausted. This is because a merchant cash advance is generally one of the most expensive forms of small business financing. However, for some companies an MCA is one of the only alternatives for small businesses owners seeking funding for working capital.
As the effects of the pandemic on small businesses are projected to linger into 2023, small business will continue to face strong headwinds in acquiring working capital. Bank lending has slowed to a trickle and those institutions have very strict lending requirements that most small businesses cannot meet. So, how does your business overcome such ordeals?
Small businesses will need to get creative and be prepared to seek alternative lenders or sources of funding for working capital. Luckily, there’s a way in which you can turn your future credit sales into today’s cash flow. Merchant cash advance lenders can help stabilize your business finances.
In businesses that have a high volume of credit card sales, such as restaurants, a merchant cash advance makes most sense as opposed to a conventional restaurant business loan. Remember, merchant cash advances are paid back from a percentage of future credit card sales. Because restaurants anticipate a higher and consistent cash flow from credit card sales they are more likely to use this type of financing.
What Is a Merchant Cash Advance?
Traditionally, a merchant cash advance (MCA) provided quick business capital based on upcoming credit card or debit card sales. However, this type of business funding can apply to most any payment type, not just card sales. That said, the majority of MCA financing is made to companies that do a significant amount of their sales via credit card transactions or debit cards.
Unlike traditional loans, cash advance companies offer your business a lump-sum, upfront cash payment in exchange for a portion of future revenue receivables. The cost of the cash advance is almost always expressed as a defined payback figure with an equally well-defined repayment schedule; unlike a loan which charges an interest rate on the amount borrowed. Repayment amounts are generally drawn from your credit card sales merchant account daily or weekly as defined in your MCA agreement.
For example, let’s say you need an advance amount of $50,000 to expand your business. The MCA provider will give you a figure (sometimes referred to as a factor rate) that will define your payback amount. Let’s say that figure is 1.3. To arrive at your payback amount using the Factor Rate multiply the amount borrowed ($50,000) times the factor rate (1.3) and the result is the amount you will be required to bay back (65,000).
MCA Factor Rate Example:
Amount of Advance | Factor rate | Payback Amount |
$50,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x | 1.3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = | $65,000 |
The application process is relatively simple compared to conventional loans however, there are usually higher costs associated with an MCA.
How to Apply for Cash Advance
The application process is straightforward. In most cases you will need to provide documentation from your credit card merchant accounts (usually several years of past statements) to give the MCA provider a solid record of sales activity. In addition, you will likely be asked to provide past bank statements for the same multi-year period. Finally, you will need to verify how long your company has been in business.
There may be other requirements from certain providers not covered here, but the three things mentioned here will likely determine your eligibility.
Applying Online
Companies such as New York-based ICapital Funding allow applicants to apply online. Many of the other providers will allow you to start your application online these days. If you have the documentation mentioned above, you can usually get a decision on your loan and amount in just a few hours. Once you have received an online confirmation of your eligibility, it is common for a representative of the company to contact you to review your payback amounts and other terms of the cash advance.
Review Terms of the Agreement Carefully
It is very important before you accept your cash advance to read the terms of your agreement very carefully. A merchant cash advance may seem like easy money, but it’s one of the most expensive ways to acquire working capital and is suitable for businesses that anticipate steady or growing sales.
If you do not understand your agreement, do not sign it until you seek advice or can understand costs and repayment terms.
How Long Does It Take to Get Money From an MCA?
In most cases providers can process the application and disburse funds to your bank account the same day you apply. The time to funding will depend on the completeness of the documentation you provide to the MCA issuer.
Why Merchant Cash Advance Loans?
We’ve discussed the costs and the process of repaying an MCA. Again, read the terms of your agreement carefully and understand the costs. MCA loans can be among the most expensive methods of financing you company.
Once you understand the costs and terms, let’s consider why a business would want MCA funding. Merchant cash advance providers can provide a financial lifeline to your struggling company. In many cases an MCA is the last resort for a business experiencing shortage of cashflow or one that experiences an immediate and unforeseen need for capital. As we mentioned in the outset of this article, most small businesses simply do not qualify for a traditional bank loan.
Some of the Benefits of a Merchant Cash Advance are Outlined Below:
Fast Application, Processing, and Funding
If you need urgent business funds, MCAs are usually processed in less than a day. Funds may reach your business account in three days, depending on the bank you use.
Less Stringent Qualifications
Merchant cash advance companies are only interested in the credit sales your business makes. Credit scores rarely influence their funding approvals.
No Collateral
MCAs are unsecured. You don’t have to use your assets to secure business funds.
Flexible Payments
The paybacks are calculated based on your credit card sales. In most cases you don’t have to worry about missing a repayment deadline since there’s no fixed payment period.
Fits Any Business Use
Once you get a business cash advance, you can use it to cover any business expense. The best use for these funds is to offset short-term operating costs like restocking. You can still use this cash to buy equipment, make payroll, expand your business, and meet other company needs.
FAQs
Who Can Apply for a Merchant Cash Advance?
A merchant cash advance is available to small businesses that make credit or debit sales.
What are the Requirements for Cash Advance?
When applying for a cash advance online, you need:Â
- A signed application
- Credit card account statements
- A business bank account
- Business bank statements (last three months)
Is a Merchant Cash Advance a Loan?
MCAs are technically not loans. You repay MCAs as a percentage of your daily credit sales plus a predetermined fee.
Do Cash Advances Affect My Credit Scores?
In most cases an MCA does not result in a personal credit inquiry. So, taking a merchant cash advance (in most cases) won’t hurt or build your credit score.
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Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.
He continues to be a regular market analyst and writer for forextv.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.
In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.
Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.
Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.
Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
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