What is a Merchant Cash Advance?

Learn More About Merchant Cash Advances

What are MCA’s?

Merchant cash advances is an alternative type of financing for businesses that need fast access to working capital to cover cash flow gaps or short-term expenses. Like a business payday loan, it can be an expensive form of financing that offers an advance of capital that uses future business credit card sales as collateral.

Who Are MCA’s Designed For?

Merchant cash advances are designed for small businesses that need fast funding but lack the business assets, collateral, or credit score to qualify for traditional business financing. Businesses with lower credit scores, insufficient collateral, a lack of business history, weak cash flow, high debt levels, or bad credit, which prevent them from getting the funding they need to operate or grow.

Because MCA’s are unsecured, you won’t need to provide business assets or collateral to qualify. The primary requirement for getting funded is that your business has strong credit card sales and consistent card transactions. Retail businesses, restaurants, hotels, and salons are examples of businesses that use MCA’s.

How do MCA’s Work

When you receive an MCA, you get an upfront lump sum of working capital. In exchange, you repay the lump sum, plus a fee, from a portion of your business’s future credit card sales.

Approval is based on the strength of your business’s card sales, not your credit score or the amount of collateral you can provide. There are no interest rate payments. Instead, you pay a flat fee called a factor rate, which ranges from 1.1 to 1.5.

You repay the advance amount plus the flat fee from a percentage of your credit card receipts. This fixed percentage, known as the holdback percentage, ranges from 10% to 25%.

Types of MCA’s

There are five types of MCA’s commonly known as merchant cash advances:

Credit Card Based Financing

Repayments are made by taking a percentage of your daily credit card sales. This type of MCA is ideal for businesses with consistent credit card transactions and is the most common form of a merchant cash advance.

Revenue Based Financing

Similar to credit card-based financing, but repayments are based on a percentage of your total revenue, not just card sales. This is suitable for businesses with steady monthly revenue from various income sources.

Sales Based Financing

Repayments are directly tied to your monthly sales. A fixed percentage of your sales goes towards repaying the advance, making it flexible according to your sales volume, typically drawn from your business bank account rather than just credit card sales.

Business Cash Advances

An upfront sum of money is provided against future business accounts receivables or annual revenue, and repayments are made through auto-debits from your business bank account deposits. This is a broader category that includes different types of business revenue.

MCA Loans

MCA Loans is a common term used by people searching for MCAs online. However, MCA loans are not actual loans but advances on future revenue.

The type of MCA offer you receive will depend on the provider’s underwriting process and what they prioritize when evaluating your eligibility. The most common and easily obtainable type of MCA is credit card-based financing.

MCA Cost and Fees

MCA’s use factor rates instead of interest rates to determine the total borrowing cost. A factor rate is a flat fee added to the MCA amount, acting as the fee for providing the cash advance. This fee is combined with the advance amount and incorporated into the repayment schedule.

Most MCA providers offer rates between 1.1 and 1.5, depending on your business’s financial health and the risk involved. While most MCA providers charge a flat factor rate fee, it’s crucial to be aware of other possible fees. Some MCA brokers and certain providers might introduce additional charges.

Before finalizing any deal, clarify any potential hidden fees with your MCA provider.

MCA Example

Imagine your business makes $25,000 each month from credit and debit card sales. You need quick cash for expenses, so you apply for a $20,000 MCA. The provider evaluates your credit card sales and credit risk and offers $20,000 at a 1.2 factor rate with a 15% daily holdback.

Details	MCA Example
Advance Amount	$20,000
Factor Rate	1.2
Holdback	$125 per day (15% of daily credit card sales)
Estimated Repayment Period	6.4 months
Total Pay Back	$24,000
Estimated APR	71.17%

The $20,000 MCA will cost you $24,000 in total ($20,000 x 1.2). From your average monthly credit card sales of $25,000, the provider will hold back 15% each day, which is approximately $125 per day ($25,000 x 0.15 / 30).

At an average of $125 a day, it will take around 192 days, or 6.4 months, to repay the $24,000. Repayment time varies with your daily sales: more sales mean quicker repayment, fewer sales mean slower. The 15% deduction remains constant.

Requirements to Qualify for an MCA

MCA’s have lower credit score requirements than traditional business financing and are much easier to qualify for than other types of financing. You don’t need extensive documentation, excellent credit, or a business plan to qualify.

Typically, MCA providers require a minimum of $8,000 in monthly credit card sales, at least six months in business, an active business checking account, and three to six months of business bank account statements.

MCA Uses

MCA’s can be used for just about any business purpose, but they are most commonly used as a form of cash flow financing to increase working capital and cover cash flow gaps in your business.

Additional uses include:

• Covering unexpected costs
• Managing cash flow
• Funding equipment purchases
• Purchasing inventory
• Financing renovations and repairs
• Covering seasonal costs.

For a more comprehensive guide on MCA qualification requirements, you can read this detailed article: Qualification Requirements for an MCA.

MCA Application Process

Applying for a merchant cash advance is much easier than applying for traditional business financing. However, the process doesn’t begin when you fill out a lender’s form. There are many considerations and research steps to take before completing the application, as well as important factors to think about if you receive a funding offer.

Steps to Apply

1. Determine the minimum amount of funding you need.
2. Conduct thorough research on MCA providers to find reputable lenders.
3. Gather all necessary documents, such as past bank statements and merchant account records.
4. Complete the online application form with accurate business and personal information.
5. Submit your application and wait for pre-approval from the MCA provider.
6. Carefully review any funding offers to ensure they align with your business needs.
7. Decide whether to accept or negotiate the terms of the funding offer.
8. Set up your repayment methods, choosing between credit card merchant processing, direct bank deductions, or ACH.

For a more comprehensive guide on how to apply for an MCA, you can read this detailed article: How to Apply for an MCA.

Common Mistakes to Avoid

• Failing to research the right lender can lead to undesirable terms; always compare their requirements, interest rates, and conditions.
• Falsifying financial information will likely result in rejection; be honest and highlight your financial strengths.
• A bad credit score can be a major hurdle; if your score is low, consider alternative funding options like an MCA.
• Mistakes on the application are common; double-check for completeness and accuracy, and ensure all required documents are included.

Pros and Cons of an MCA

MCA Pros

The main benefits of MCAs include fast funding and easy qualification. With same-day funding, no collateral, and minimal paperwork, it is one of the quickest and simplest ways to secure working capital for your business.

Additional benefits include:

• Easier qualification
• Easy online application through mobile, tablet, or computer
• Acceptance of bad credit applications
• No credit checks
• Flexible approval requirements
• No physical collateral is required, and no restrictions on fund usage.
• Same day approvals possible

For a more comprehensive guide on the benefits of an MCA, you can read this detailed article: Benefits of an MCA.

MCA Cons

The main drawbacks of MCAs are high fees and short repayment periods because they are high-cost financing, which can increase costs and strain your business’s cash flow.

Additional drawbacks include:

• More expensive than loans
• Very high APR rates
• Daily repayments may hurt future cash flow
• Shorter repayment periods
• Won’t improve credit score
• Cash-only businesses are not eligible.

For a more comprehensive guide on the drawbacks of an MCA, you can read this detailed article: Drawbacks of an MCA.

MCA’s and Your Credit

It’s important to understand the implications an MCA might have on your credit score and credit report.

MCA’s With Bad Credit

Business owners with poor or subprime credit who need funding can qualify for a merchant cash advance because it’s similar to a bad credit business loan. Approval focuses on a business’s credit card sales, not solely on credit score, making it easier for bad credit borrowers to secure funding. Businesses with no business credit history are also eligible. The minimum credit score requirements are very low, such as a FICO score of 500.

MCA’s and Credit Checks

Business owners can get approved for an MCA with no credit check. The majority of MCA providers don’t complete hard credit pulls. Instead, they conduct a soft credit pull, which provides enough information to assess your application without impacting your credit score. Unlike a hard credit check, which can temporarily lower your score, a soft credit pull does not affect your credit score at all. This makes MCAs an appealing choice for business owners with poor credit who still need fast access to capital.

How MCA’s Affect Your Credit Score

MCA providers do not report giving you an MCA or your MCA repayment history to the credit bureaus. This is because MCAs are not classified as loans, so there is no obligation to report them to credit bureaus. If you default on your MCA, the initial default will not appear on your credit report. However, if the debt you owe is sent to a collection agency or attorney, it could negatively impact your credit report. A lawsuit resulting in a judgment against you may appear on your credit report and harm your credit score.

Improving Credit Scores with MCA’s

MCA’s do not improve your credit score because your history of repaying your MCA on time does not get logged on your credit report. So, even if you make timely repayments, it won’t positively affect your credit score.

Repaying an MCA

Once you have received your MCA, the repayment phase starts. Your MCA provider sets up automatic deductions from your daily or weekly sales based on your agreement. This process works in the background, so you can focus on your business.

The Setup Phase

Usually, the MCA provider handles the setup of automatic repayments without needing your input. Some providers may ask for written permission to show your merchant processor that the automatic deductions are authorized.

Automatic Deductions

With the setup complete, a portion of your sales is automatically directed towards repaying the advance. This makes the repayment process easy for you.

Repayment Options

There are three main ways MCA providers can deduct repayments from your business:

Split Withholding Repayments

A percentage of your daily credit card transactions is automatically deducted from your credit card processing account and directed to the lender. This method adjusts the repayment amount based on your daily sales. If you have high credit card sales in a day, you repay more. If sales are low, you repay less.

Lock Box or Bank Account Withholding Repayments

Your sales revenue is first deposited into a designated account. The lender takes their share from this account, and the remainder is then transferred to your account. This method acts like a middleman, separating your sales from the repayment process.

ACH Withdrawal Repayments

A predetermined amount is deducted from your bank account at set intervals through Automated Clearing House (ACH) withdrawals. This method provides a consistent repayment schedule.

Repayment Duration

The repayment auto debits continue until you have repaid the advance amount, plus the factor rate fee and any other agreed fees. MCA companies aim to keep repayment periods between 3 and 18 months.

Choosing the Right MCA Provider

It’s important to conduct thorough research on MCA providers because merchant cash advance companies are not subject to loan usury laws. Careful research will help you find a reputable company with fair terms so you can avoid predatory lenders.

Make sure to check:

• The provider’s reputation by reading online reviews on third-party websites to confirm they are reputable.
• Before applying for an MCA, call the MCA company and discuss to learn more about the MCA product they offer to test their customer service.
• Ensure the provider is familiar with your businesses industry, which will make them more likely to fund your business because they understand your business’s financing needs.
• Before accepting any funding offer, call the provider to confirm if there are any additional fees associated with the MCA and confirm the total amount you will pay back.
• Apply to multiple MCA providers to compare offers because fees, rates, and APRs vary from lender to lender. Choose the one with the best factor rate, longest repayment period, and most favorable terms.
• If you have poor credit, focus on working with MCA providers that evaluate applicants based on your business revenue and credit card sales rather than credit score.

Doing all these checks will help you choose a provider that is right for you and reduce the risk of working with an MCA provider that is not reputable or trustworthy.

Seasonal Businesses and MCAs

Seasonal businesses often face drops in cash flow during off-peak seasons and need short-term financing to cover those drops and for working capital. MCA financing can be an excellent option for businesses that experience seasonality and often struggle to get conventional business financing due to negative cash flow or a less-than-perfect credit profile.

These seasonal businesses can sell a portion of their credit card sales volume, allowing them to pay less when sales are low during the off-peak season and more when sales are high during the peak season. This flexible repayment structure aligns with the fluctuating income of seasonal businesses, making it easier to manage repayments without straining cash flow during slower periods.

Legalities of MCA’s

MCA’s are not as strictly regulated as traditional loans and are not subject to usury laws. Because of this, some providers can engage in predatory lending practices, such as charging very high fees and imposing unfair terms.

Merchant cash advance contracts and agreements can include policies like confession of judgments and personal guarantees, which often skew the agreement in favor of the MCA providers. Although this type of financing is unsecured, these policies can make you and your business personally liable to repay the advance, risking not only your business assets but also your personal assets.

Therefore, it is crucial to thoroughly review and understand MCA terms before signing, consult financial and legal experts to help you avoid risky clauses, and ensure you have a solid repayment plan to protect your assets.

Defaulting on an MCA

If you intentionally or accidentally default on an MCA, the MCA company that gave you the cash advance can take legal action against your business or you personally to recover the owed amount.

If you miss even one repayment, you may be technically in default according to most merchant cash advance contracts. Many small business owners do not fully consider this detail when taking out an MCA. Since repayments are usually deducted on a daily or weekly basis from your credit card sales, even a small issue like a technical glitch can quickly put you in default. It is crucial to consistently monitor your account to ensure repayments are being processed so you don’t end up in default.

Although MCAs are marketed as unsecured business financing, MCA companies can still take your business assets to recover the owed amount. MCA providers are likely to file a lawsuit to recover the unpaid balance and any additional fees. If you’ve signed a confession of judgment or a cognovit note, you’ve given up your right to defend yourself in court. This allows the MCA provider to secure a judgment against you and seize your funds, bank accounts, and other assets without your presence in court.

For a more detailed breakdown of the legal consequences, impact on your credit score, and how to avoid defaulting on an MCA, read “What Happens If You Default on an MCA.”

Alternatives to MCA’s

Before turning to MCA’s to fund your business, consider using personal or business assets or a co-signer to secure more affordable funding.

Other small-business loan alternatives to Consider:

Business Lines of Credit: Borrow what you need and pay interest only on the amount used. Ideal for ongoing cash needs.

Bank Loans: Get low rates if your credit score is above 670. Payback period is 3 to 10 years.

Online Lender loans: Easy approval with a 580+ credit score. Rates range from 8.5% to 45%.

Invoice Financing: Turn unpaid outstanding invoices into quick cash. Service fees are 1% to 5% per invoice.

Revenue-Based Financing: Get money now and repay with a portion of future sales. Ideal for steady income.

Asset-Based Loans: Use business assets as collateral. Competitive rates between 5.25% and 15%.

SBA Loans: Low rates and long repayment terms, but strict criteria apply.

Business Credit Cards: Flexible credit for short-term expenses. Rates range from 18.5% to 28%.

Equipment Leasing: Lease machines, furniture, and more. Monthly payments with rates from 7% to 16%.

Equipment Loans: Buy equipment and pay over time. Own it at the end, with a 3 to 5-year payback period.

All of these alternatives offer more favorable terms and rates than MCA’s, provided you can qualify for them. For a detailed breakdown of each type of alternative funding, read our guide on alternatives to MCA’s.

Is an MCA Right for Your Business?

All forms of money lending come with potential risks. A merchant cash advance can be a good option for businesses and business owners with bad credit histories who are unable to qualify for other types of business financing. However, with very high APR rates ranging from 50% to 200% and high factor rate fees, it’s a very expensive type of financing.

Before committing to a merchant cash advance or any type of subprime credit, make sure it’s a financially sound choice for your business so you don’t end up falling into a cycle of debt. Consider cheaper forms of business funding before relying on this more expensive way to fund your business.