What is Merchant Cash Advance?

Many small business owners who are desperate for cash consider this Merchant Cash Advance (MCA), For owners of startups or those with bad credit, an MCA may seem like the only financing option for dealing with a cash flow crunch, purchasing inventory, addressing an urgent need working capital, to deal with a financial emergency, or for other business needs. Merchant cash advances are not technically loans, which can be a source of confusion. Instead, it’s the company buying your future sales, which you’ll use to pay them back. This article answers common questions about MCAs so you know what you’re getting into before you agree to take one. I’ll also explain other business funding options that may be more prudent.

What is a merchant cash advance?

A merchant cash advance is an alternative type of financing to a more traditional small-business loan. With an MCA, a financing company provides you with a lump sum amount of cash that you repay using a percentage of your future credit card sales in addition to fees. An MCA is not like a traditional bank loan. Instead, a provider buys your future sales. You use those sales to pay off the fees in addition to the money.

Who is a merchant cash advance right for?

Merchant cash advances can be a great solution for small businesses that need capital to cover cash-flow issues or immediate-term expenses.

Be aware: MCAs often come with triple digits annual percentage rate (APR), Paying off this type of financing can make it nearly impossible for a small business to get out of debt. It is wise to explore other small business loan options before signing up for one.

How are merchant cash advances repaid?

MCA payment can happen in two different ways:

1. Percentage of Debit/Credit card sales

Taking a percentage of your daily credit card sales is the traditional way of handling MCA payments. Merchant cash advance providers automatically and regularly (usually daily or weekly) deduct a portion of your debit and credit card sales until the cash advance provided by them is repaid in full. This is a big difference from traditional loans, which typically require monthly payments.

Unlike more traditional small business loans, MCAs do not come with typical repayment terms. The repayment term is based on your sales. They typically last anywhere from three to 18 months. You can expect to be able to repay a cash advance relatively quickly if your credit and debit card sales are high.

2. Regular fixed withdrawals from your business bank account

Some MCA providers also withdraw funds directly from business bank accounts. Fixed payments are taken out of your account daily or weekly, no matter how much you make in sales. The fixed payment amount is based on an estimate of your monthly revenue, usually determined by your historical sales.

The advantage of this type of MCA repayment structure is that it allows you to calculate how long it will take to pay back the MCA. This is usually a better option for companies that don’t have significant debit and credit card sales.

What are the rates and fees of MCA?

In place of a specific interest rate, MCA providers charge a factoring fee. They typically range from 1.1 to 1.5, varying depending on your:

  • Industry
  • number of years in business
  • company financial health
  • Credit and debit card transaction levels
  • Personal Credit Score.

Similar to traditional loans, higher factor rates and fees will be assigned to businesses that present greater repayment risk.

Be aware: The factor rate also does not include the fees MCA providers typically charge, including administrative and underwriting fees, which can be high and increase your cost of financing.

How do you calculate MCA fees?

To come up with MCA costs, multiply the cash advance amount by the factor rate.

For example, if you are approved for a $100,000 advance at a factor rate of 1.4, your total repayment amount would be $140,000. You are paying a significant $40,000 in factoring fees. This does not include administrative and other expenses which can significantly increase your cost of borrowing.

To really understand the total borrowing cost of an MCA, convert the factor rate and additional fees into an annual percentage rate (APR). Taking this step will also help you figure out how long it will take to pay off the advance.

Based on the previous example, this is what it would look like if an MCA provider deducted ten percent of your monthly credit and debit card interest at a 1.4 factor rate for a $100,000 advance.

If your monthly card sales are $100,000

Payment Amount: $666 per day

repayment term, seven months

Total Paid (not including administrative fees): $140,000

Estimated APR: 125 percent

If your monthly card sales are $70,000

Payment Amount: $466 per day

repayment terms, Ten Months

Total Paid: $140,000

Estimated APR: 87.3 percent

In this example, paying off a merchant cash advance more quickly actually results in a higher APR. If your card sales are low, your APR decreases. However, it takes longer to repay the loan. In either case, you’ll pay the same APR fee.

What’s important to take away is just how expensive a merchant cash advance can be. APRs are usually much higher than most small businesses can afford.

What are the advantages and disadvantages of MCR?

Merchant cash advances have benefits and significant drawbacks.


quick money

The application process and approval process for merchant business cash advances are usually quick. You can usually get approved faster with minimal documentation such as a commercial bank statement. Many MCA providers can supply funding in as little as one business day.

relatively easy eligibility

MCA providers can approve financing for small businesses with bad credit, startups, and people with financial difficulties. They will likely consider some small business loan eligibility requirements, but your debit and credit card transactions or business revenue will probably be a more important factor. Ultimately, the better your qualifications, the lower the factor rate you will be offered.

No collateral or personal guarantee required

You will not need to hold personal or business assets to back the merchant cash advance.

Repayment amount is based on your credit card receipts

Unlike other types of small business loans, your payments are based on a fixed percentage of your sales volume.


relatively expensive form of financing

The overall cost of merchant accounts is relatively high compared to traditional business loans, such as short-term loans or business lines of credit. Standard loan APRs typically range from nine to 99 percent. By comparison, the MCA APR can reach up to 350 percent depending on a variety of factors, including the lender, size of the advance, fees, repayment time, loan risk and business revenue.

Real borrowing costs are challenging to understand

Unlike traditional loan interest rates and fees, factor rates make it more difficult to figure out how much an MCA will cost you.

recurring payments

Merchant cash advances are usually paid daily or weekly. Payments are deducted directly from your incoming sales or business bank account, which can negatively impact your cash flow.

credit cycle risk

The high cost of MCAs, combined with repeated payments, often results in a cycle of debt that can be impossible to break. This is especially true if you take out an additional advance because you may not qualify for other financing options. Many small businesses fail after taking out multiple MCAs.

No early repayment benefit

Since you must repay a fixed amount of your credit card payments daily or weekly, you cannot save on interest by paying off early, a common benefit of traditional amortizing loans.

hard to understand paperwork

MCA contracts can be confusing. This is especially true when it comes to factor rates and repayment programs that are based on a percentage of your daily sales. merchant cash advance companies Usually do not provide annual percentage rates in their agreements. This factor makes it challenging to compare MCAs with other types of small business financing.

Be aware: Some states have passed laws that have forced transparency on MCA companies in recent years. However, many have not. Providers have historically been criticized for confusing agreements.

no federal government regulation

Unlike traditional forms of financing, merchant cash advances, which are considered commercial transactions, are not subject to federal regulations. uniform Commercial Code Controlled by the MCA of each state. This limited regulation has often led businesses to become victims of bad actors who take advantage of questionable marketing and sales tactics that lure people into bad deals.

What are the alternatives to MCA?

By now, it should be clear that MCA should be your financial choice as a last resort. Before you agree to one, you should look for alternative financing options.

Even if your business is new, or if you have a poor credit history or need money quickly, some online lenders prefer Biz2Credit Offer considerate small-business loans. These include loans that make sense for immediate cash flow needs and financial emergencies, such as short-term loans and business lines of credit. You might also consider getting a business credit card, which is often easier to get approved for and an effective type of business financing for urgent cash needs.

It’s always worth checking out your options. This can help prevent a mistake that could cost you the business you’ve worked hard to build.

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