Merchant cash advances provide small businesses with an alternative to other financing, like traditional bank loans. Business owners receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance with a percentage of the business’ sales. An MCA can be an option for businesses that have high credit card sales volume, need funding quickly, or may not qualify for a traditional loan.
When a small business finds itself in a bit of a financial pinch or needs to access capital quickly, there aren’t many options available. This is one of the advantages of a merchant cash advance. A merchant cash advance provider will provide an approved amount, and the merchant will repay the advance with a percentage of each day’s credit card sales. Interest rates on merchant cash advances are often notoriously high, and determined by a factor rate, essentially a multiplier of the principal advance. For example, if a business is approved for $100,000 with a factor rate of 1.5, the total amount to repay would be $150,000 ($100,000 x 1.5). The daily payment would then be determined by the terms of the advance.
The factor rate and subsequent APR is determined more by the applicant business’ sales performance. Simply, better revenue numbers can put the applicant in a better situation with a potentially lower factor rate. Merchant cash advances have very low credit requirements, so applicants with bad personal credit or thin business credit profiles can make up for it with solid sales numbers.
The hallmark benefit of merchant cash advances is the fast access to cash. Many issuers can get you the cash within 48-72 hours. They also don’t require sterling personal or business credit, 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 often offer flexible repayment terms.
Merchant cash advances can be very expensive. If you’re pegged with a high factor rate, you can pay up to 200% APR, and even a low factor rate can bring you around 35%. And, because they are not a loan and don’t report your payment history to the business credit bureaus, they won’t help you build business credit, making this an unproductive source of financing for a startup business looking to bulk up their business credit history or profile. Often, with daily required payments and required credit card payments, merchant cash advances can quickly become a cash flow burden if not managed properly.
Getting a merchant cash advance is quick and easy, and filing an application can take very little time. With quick approval turnarounds, you can access cash much quicker than with other means of financing, including short-term loans or long-term loans.
Each merchant cash advance will have a principal amount, a factor rate, a payment period, payment frequency (often daily), and a percentage deduction of your daily credit card sales, including future sales.
Because a qualifying business owner can usually access an MCA quickly it can be a good option for a business owner who needs fast cash to cover some of the following uses cases:
If you have the cash flow and credit card receipts to support the typical daily debit from your merchant account, an MCA will allow you to get in and out of the financing quickly and should be considered a short-term financing solution—albeit a sometimes expense one.
Qualifying may be the easiest part of working with a merchant cash advance. Unlike most business financing options, applicants don’t need to have years in business to qualify. The amount and number of your credit card transactions are more important than a business’ credit profile, putting less emphasis on personal and business credit information—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.
A Merchant Cash Advance provider is typically more 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.