Overview of Merchant Cash Advances
For small business proprietors in urgent need of immediate capital, a Merchant Cash Advance (MCA)
might be the ideal solution. Alternatively known as a Business Cash Advance, this readily
available form of cash advance offers merchants flexibility in payment terms without the
stringent prerequisites of an excellent credit score or extensive financial statements typically
associated with eligibility.
The repayment amounts for a merchant cash advance rely on daily credit card sales and are not
fixed. This means that business owners only need to pay an amount that aligns with their monthly
cash flow capacity. Moreover, unlike traditional business loans, a merchant cash advance remains
cost-effective even during temporary slowdowns in sales, making it well-suited for small
businesses that may find it challenging to adhere to a fixed payment schedule.
What Constitutes a Merchant Cash Advance?
A Merchant Cash Advance (MCA), also known as a "Business Cash Advance," "Credit Card Factoring,"
or a "Credit Card Processing Loan," offers a convenient financing option for business owners.
Instead of facing the challenges associated with traditional small business loans, this
alternative allows individuals with limited collateral, minimal business credit history, or low
FICO credit scores to qualify more easily.
In this arrangement, a business owner receives a lump sum payment, typically promptly, from the
MCA provider. The repayment structure involves a fixed percentage of daily credit card sales,
known as the Holdback Rate. Payments are automatically deducted each day, with the actual amount
varying based on the fluctuating volume of debit and credit card sales.
The qualification for business financing through an MCA is determined by the anticipated amount
of future credit card receivables or sales made using credit card payments. Essentially, the
business owner agrees to receive an upfront capital payment, albeit at a discount, in exchange
for a percentage of future credit card sales. This serves as an expedited alternative to waiting
for the full amount from the credit card processing company over a more extended period of weeks
or months.
ANNUAL REVENUE
Exceeding $120,000
CREDIT SCORE
Not less than 550
TIME IN BUSINESS
A minimum of 4 months
What is the Mechanism of a Merchant Cash Advance?
A Merchant Cash Advance operates differently from traditional bank loans, with eligibility and
terms primarily based on your monthly credit card sales volume, both historical and anticipated.
The key qualifying factor for a merchant cash advance is a robust track record of sales from
debit and credit cards, making it a viable option even for those with poor credit.
While creditworthiness may not be a significant barrier to qualification, your business credit
profile does influence various aspects of the merchant cash advance. One crucial element is the
"holdback rate" or "holdback percentage," representing the fixed percentage of daily or weekly
sales that is deducted. Typically ranging between 8% and 15% of daily sales, the holdback amount
adjusts in tandem with your business revenue.
In contrast to traditional bank loans that utilize an interest rate, a Merchant Cash Advance
employs a Factor Rate to determine the total repayment amount to the provider. This Factor Rate,
typically falling between 1.09 and 1.5, is a key factor in shaping the overall repayment terms
for the merchant cash advance.
What Benefits Accompany a Merchant Cash Advance?
Consider an example of a Merchant Cash Advance: Let's say you secure a $50,000 advance with a
factor rate of 1.4. This implies a total repayment of $70,000. The MCA provider deducts 10% of
your debit and credit card transactions each time you settle your batch.
In the initial month, your card transactions total $100,000. With a holdback percentage, you
would make daily payments of $333, resulting in a monthly repayment of $10,000. In the
subsequent month, your sales decrease, and you only have $70,000 in credit card receipts.
Despite the drop in sales, the holdback repayment terms remain constant, leading to a reduced
daily payment of $233.
Similar to other short-term business financing options, a Merchant Cash Advance is structured to
be repaid expeditiously. However, the overall cost decreases when payments are more evenly
spread out during periods of slower sales. This flexibility allows businesses to navigate
variations in revenue without facing excessive financial strain.
Consider an example of a Merchant Cash Advance: Let's say you secure a $50,000 advance with a
factor rate of 1.4. This implies a total repayment of $70,000. The MCA provider deducts 10% of
your debit and credit card transactions each time you settle your batch.
In the initial month, your card transactions total $100,000. With a holdback percentage, you
would make daily payments of $333, resulting in a monthly repayment of $10,000. In the
subsequent month, your sales decrease, and you only have $70,000 in credit card receipts.
Despite the drop in sales, the holdback repayment terms remain constant, leading to a reduced
daily payment of $233.
Similar to other short-term business financing options, a Merchant Cash Advance is structured to
be repaid expeditiously. However, the overall cost decreases when payments are more evenly
spread out during periods of slower sales. This flexibility allows businesses to navigate
variations in revenue without facing excessive financial strain.
Business Expansion
Equipment Purchase
Working Capital
Debt Consolidation
Marketing and Advertising
Renovations or Upgrades
What Drawbacks Are Associated with a Merchant Cash Advance?
A significant portion of small businesses in the United States, approximately 64%, continues to
grapple with financing challenges, encompassing issues such as managing operating expenses,
accessing capital, and handling debt payments. This information is sourced from the Small
Business Credit Survey: 2019 Report on Employer Firms.
The landscape of online lending is experiencing continual growth. According to Morgan Stanley's
projections, by the close of 2020, online lenders and fintech companies are expected to provide
small businesses with $47 billion in loans, constituting 16% of total credit approvals for small
and midsize businesses. This insight is derived from data provided by the National Community
Reinvestment Coalition.
The prevalence of debit and credit card transactions has demonstrated an annual increase of 8.9%
each year between 2015 and 2018. Additionally, ACH (Automated Clearing House) payments have
shown steady growth, expanding by 6% annually from 2015 through 2018. These figures are sourced
from the 2019 Federal Reserve Payments Study: Initial Data Release.
Banks and Credit Unions
- Rapid access to capital
- Streamlined and straightforward
approval process
- Acceptance of less-than-perfect
credit
accepted
- Versatile usage for various
purposes
purposes
Private Lenders
- Elevated rates and fees compared to
traditional loans
- Limited or no advantage in early
repayment of Merchant Cash Advance (MCA)
- Shorter repayment terms may lead to a
reduction in working cash flow.
accepted
Merchant Cash Advance Compared To Other Products
- Merchant Cash Advances
- SBA Loan
- Business Term Loan
- Business Line of Credit
- Receivables/Invoice Financing
- Equipment Financing
- Revenue Based Business Loans
- $5k – $1m
- $50k-$5.5m
- $10k to $5m
- $1k to $1m
- $10k-$10m
- Up to $5m per piece
- $5K – $1m
- Starting at 1-6% p/mo
- Starting at Prime + 2.75%
- Starting at 1-4% p/mo
- Starting at 1% p/mo
- Starting at 1% p/mo
- Starting at 3.5% (SBA)
- Starting at 1-6% p/mo
- 1-2 business days
- 8-12 weeks
- 1-3 business days
- 1-3 business days
- 1-2 weeks
- 3-10+ business days
- 1-2 business days
The Process of Applying for a Merchant Cash Advance:
Assess Your Needs
Before initiating the application process, evaluate whether a Merchant Cash Advance is the right
financial solution for your specific needs. Consider how you intend to use the capital, assess
whether the repayment structure aligns with your operating capital goals, and determine the
exact funding amount required. Addressing these questions beforehand will streamline the
application process.
Collect Required Documents
Prepare the necessary documentation for the application, including:
- United States Driver’s license
- Voided business check
- Business bank account statements from the past three months
- Credit card processing statements from the past three months
Complete the Application
Commence the application process by either calling our representative or filling out our concise
online application form. During this stage, you will input the information gathered in the
previous section, along with specifying your desired funding amount.
Consult with a Representative
Following your application submission, a representative will get in touch with you to provide a
detailed explanation of the repayment structure, rates, and terms associated with the available
funding options. This ensures transparency and helps you understand any potential fees or
surprises during the repayment period.
Approval and Funding
The approval process typically takes a few business days. Upon approval, the cash advance will
be deposited into your checking account within 1-2 business days.
What If My Application for a Merchant Cash Advance is Declined?
If your application for a merchant cash advance is rejected, it may be due to the strain the
daily repayment structure could place on your operating capital. Responsible merchant cash
advance lenders, including us, may suggest alternative products that impose less pressure on
your operating capital and are more manageable for repayment. Options like accounts receivable
factoring, equipment loans, or working capital loans could be explored.
In cases where a business owner cannot take on more debt at the moment, we might recommend
considering other financing tools or loan alternatives. Business credit cards or personal loans
are potential options that can aid in credit building and are typically easier to qualify for
than small business loans.
If a rejection stems from poor FICO scores, exploring credit repair services could be
beneficial. These services can assist in enhancing both personal and business credit scores by
identifying issues affecting your scores and creating a plan to address them. Often, these
issues involve straightforward solutions, such as settling outstanding payday loans or reducing
personal debt. Taking these steps not only improves your eligibility for future merchant cash
advances but also positions you for potential small business loans with more favourable interest
rates.
