A merchant cash advance (MCA) is not technically a loan. With an MCA, a financing company advances you cash in exchange for a percentage of your daily credit card and debit card sales, plus a fee. Merchant cash advances can be quick, easy ways to get a business cash advance with no need for collateral—even if you don’t have a great credit score.
• Quick access to funds
• Easy approval process
• Bad credit is accepted
• Suitable for a wide range of business purposes
• Higher fees than with traditional loans
• Less flexibility to change merchant service providers
• Daily deduction of credit card receipts reduces cash flow
Applying to a merchant cash advance is a fast and easy process. Because merchant cash advances are paid back with your daily credit card sales, MCA companies will look at your credit card processing statements to make sure you have enough volume coming into the business. Some merchant cash advance companies will ask for your credit score and bank statements, too.
Merchant cash advance applications are almost always online, and applications can be approved the same day you apply. Remember: fast cash is expensive cash, and an MCA is no exception. A merchant cash advance application is fast and easy, but MCAs come with the highest cost of capital on the market.
Every business could use some extra capital. But applying for loans takes time and energy that you might not have.
Plus, even after you send out an application, there’s a chance you don’t even qualify.
At Ameritech & Associates, we pride ourselves on having a marketplace that can help out all different sorts of business owners. If you don’t have the time to wait for a typical loan or wouldn’t qualify, a merchant cash advance might be for you.
How would you like a cash advance—approved and funded in just a day or two—with almost no paperwork involved?
That’s what a merchant cash advance is, with one caveat:
In return for that lump sum advance, you agree to pay the lender back with a percentage of your daily credit card sales. For this reason, MCAs typically make sense for businesses that get most of their revenue from credit card and debit card sales (but you don’t have to get all your revenue this way in order to qualify for a merchant cash advance).
How does it work in practice?
Well, with most types of MCAs, a provider will offer you a lump sum of cash in exchange for a slice of your daily credit card and debit card sales. Typically the MCA is paid back by remitting that percentage of your sales from your bank account—through ACH (Automated Clearing House) withdrawals. As merchant cash advance providers can just plug into your bank account or credit card processor, they can be easy-to-access, quick products.
While a merchant cash advance is definitely one of the faster financing options out there, it is the most expensive loan on the market.
Merchant cash advance providers measure their fees with a factor rate instead of an interest rate.
Ranging from 1.14 to 1.48 typically, a factor rate is what you multiply your loan amount by to figure out the total you’ll owe.
Converted to APR, these rates often start at 15% but can get all the way up to triple digits.
Merchant cash advances can get so expensive for a few different reasons. The most important reason is that merchant cash advances tend to work for riskier borrowers—those with lower credit scores or those with newer businesses. And riskier lending options correlate with higher rates and fees.
The average repayment time frame for a merchant cash advance is 8 or 9 months.
But the term can be as short as 4 months and as long as 18, depending on your business.
And the higher the fixed percentage of your credit card sales you’re paying the lender with, the shorter your repayment time—and the tighter your cash flow.
How do you know whether a merchant cash advance will make sense?
On the one hand, paying off a loan with daily credit card sales can bite into your cash flow more than you might expect.
On the other, you’ll actually repay a smaller amount of money during slower weeks and months—unlike with a term loan, where you’ll either make your payments on time or suffer the late fees.
There are other reasons why some borrowers might want to opt for a merchant cash advance rather than a more traditional business loan.
For one, merchant cash advances come unsecured—meaning you don’t have to offer a valuable piece of collateral in exchange for the loan. This can be a benefit for business owners who don’t want to put something like their personal home or financial assets at risk.
And finally, merchant cash advances are quick. Need cash this week? A merchant cash advance can probably be approved by then.
These two advantages correlate with high costs, though. So when it comes down to it, it’s up to you to understand your business’s financials. Just remember that a merchant cash advance is the most expensive financing option you could pick.