Obtaining funding for a business can be challenging, particularly when it involves a traditional lender who requires a lot of documentation, a high credit score, and a lot of time to approve the application. For those who need funding quickly, a merchant cash advance (MCA) can be a great option. MCAs provide fast business funding by offering a cash advance on a company’s future sales, making them a good option for businesses with higher credit card sales.
Although merchant cash advances can be useful for alternative business financing, they are costly and come with difficult repayment terms. It is important to learn the details of how they work before making a decision.
What Is a Merchant Cash Advance?
Unlike a regular loan, a merchant cash advance is in the form of an advance on revenue. Instead of paying back a fixed amount every month, businesses repay MCAs by paying a portion of their credit card transactions each day.
This adaptation of financing is particularly popular with retail merchants, restaurants, e-commerce companies, and service-oriented establishments that have a large volume of card transactions. Because repayment is linked to sales revenue, during high sales periods, businesses pay more whereas during slow sales periods, businesses pay less which provides cash flow flexibility.
Merchant cash advances do not have conventional interest rates that are fixed on loans. Instead, they use a factor rate which is a multiplier and sets the prospective amount payable. For instance, a $20,000 advance paid on a factor 1.3 gives total repayment due as $26000.
Complicated calculations aside, it is relatively easier to understand how these changes and structures can be really beneficial for some businesses who need fast cash. However, it also means that they may incur higher costs than other forms of financing so while it may be tempting to go for MCAs, it’s important to remember to consider the amount the business needs versus what the oftentimes hidden costs of some of the funding sources may be.
How Merchant Cash Advances Work
Step 1: Application Process for MCA
MCA providers review the credit card sales history of a business to processors to approve or disapprove the business. Unrealistically low, zero or bad credit score expectations are matched with adequate consistent revenue.
Step 2: Receiving Advance Cash Payment
Approved businesses receive a one-time cash payment ranging between a few thousand and several hundred thousands, within 24-48 hours of approval.
Step 3: Paying Back the MCA through Credit Card Sales
The seller gets paid back through credit card payments, and there is no fixed monthly payment: a percentage (usually in the range of 10 to 20 percent) of credit card sales gets deducted daily until the entire amount is paid.
Interest Rate vs. Factor Rate
Unlike traditional loans, the MCA does not apply an interest. Instead the provider will deduct a factor rate within the region of 1.1 to 1.5. This means a business could owe $1.10 to 1.50 on every $1.00 it borrows.
Sample MCA Repayment Calculation
Advance amount $20,000
Factor rate 1.3
Total repayment $26,000
Daily repayment per day $50.00
In case the seller averages 10k dollars a month on his credit card sales and he withholds 15% of it. Daily revenue gets offset by the seller’s claim to the business. So there’s no fixed cost.
Merchant Cash Advance Qualification Checklist
Compared to most other loans, MCAs are more accessible to the public. Here are the most common criteria an MCA provider will expect.
- Credit Card Processing Volume: Businesses must have consistent sales through credit card transactions on a daily to monthly basis.
- Time in Business: Most MCA providers will ask for a minimum of 6 months of business operation.
- Revenue Minimums: Most providers expect to see at least $5,000 to $10,000 dollars a month in revenue.
- Credit Score: Businesses lacking a credit history find it easy to access an MCA since there is no formal requirement for a credit score.
Because the lender’s risk is high, the factor rates are usually very high. Before accepting an MCA, businesses must evaluate their ability to take the daily deductions from their revenue
Pros and Cons of a Merchant Cash Advance
Pros:
✅ Fast Business Funding – Many MCAs will provide funding within the first 24 or 48 hours.
✅ No Fixed Monthly Payments – Monthly payments are not fixed and depend on sales revenue, hence there is less financial tension.
✅ No Collateral Required – MCAs do not need any property or equipment as collateral.
✅ Easier Qualification – Collateral giving is not compulsory and even business owners with a bad credit score or new businesses have a chance.
Cons:
❌ High Cost — MCAs are some of the most expensive types of financing because of the other costs incurred on them.
❌ Daily Repayments – These type of cash advance includes the deduction of a portion of sales as daily repayments, negatively impacting cash flow.
❌ Limited Regulation – Unlike banks, these MCA providers can set any term they want, why it is common to find low benefits of high charges.
How To Apply For A Merchant Cash Advance
Step 1: Research MCA Providers
- Search for reputable lenders who advertise low charges and clear terms.
Step 2: Collect Required Documents
- Your latest statements from credit card processors
- Statements for your business bank account
- Evidence of ownership of the business
Step 3: Analyze Factor Rate and Repayment Term for Comparison
- Determine how much repayment will cost and the impact it has on cash flow projections.
Step 4: Submit Application and Disburse Funds
- Most businesses will receive the funds within 1–2 working days.
- Merchant Cash Advance vs. Other Business Funding Solutions
- MCAs are not other options available. This is how they differ from the others:
- Standard Business Loans – Interest rates are lower, but the qualifications for the loan have higher thresholds.
- Business Revolving Credit – Fundings are provided at greater discretion; nevertheless, good credit scores might be obligatory.
- Loans to Finance Working Capital – These come with defined repayment terms, but are less expensive than MCAs (Find out more on working capital loans).
- Financing an Equipment Purchase – This is ideal for businesses that need to purchase equipment and do not want to advance cash. (View equipment financing)
- An MCA might be helpful for business owners who have regular sales but have bad credit.
How to Effectively Manage an MCA without Straining Cash Flow
- Because repayments on MCAs are both daily and automatic, businesses must account for their cash flow very carefully.
- Track Daily Sales and Cash Flow – Make sure there are sufficient earnings available to cover expenses after the MCA payments during the operating cycle.
- Do Not Take Several MCAs – Multiple advances may result in financial stress.
A Merchant Cash Advance Suitable For Your Business?
Prior to submitting an application for an MCA, take some time to think about: Can I handle daily cuts from sales? Are any other less expensive financing options more accessible? Is the business revenue reliable enough to ease the repayments? For businesses that experience high credit card sales and have few loans, an MCA can offer quick business funding. The value of the funds has to be weighed against the costs.
Merchant cash funnels are helpful tools for immediate access to capital; however, they come at a much higher cost than other options. If the MCA option is on the table, be sure to consider the factor rates, repayment options, and other alternatives.
Need assistance in searching for the best business option for funding? Check with First Horizon Solutions and obtain the aid with funding while steering clear of daily repayment worries. View the options for fast funding business here. Or Schedule A Call Now!
