Merchant Cash Advances (MCA) are tools that offer distinct advantages, especially for businesses with robust credit card sales. Unlike traditional loans, which may have a rigid repayment schedule, an MCA provides immediate access to capital with a repayment plan tied directly to your daily sales volume.
Consider a mid-sized retail company: If this company leverages an MCA, it gains access to capital that can be used for crucial expansions or operational enhancements without the rigid repayment structure of traditional loans. As the business earns, a portion of daily credit card transactions is used to repay the advance, with the specific payment tailored to the amount the business earned within that period.
By exploring the mechanism, advantages, and critical considerations of MCAs through practical examples and direct comparisons, this guide will equip business owners with the insights needed to decide if an MCA is suitable for integrating into their financial strategy.
Understanding Merchant Cash Advances
A Merchant Cash Advance (MCA) is an innovative financing solution tailored for businesses that handle a significant volume of sales via credit and debit card transactions. Unlike conventional loans, an MCA provides businesses with fast access to funds based on future sales projections, offering flexibility and immediacy that traditional financing routes often lack.
Core Features of an MCA:
- Advance Amount: Businesses receive an upfront sum of cash based on their average credit and debit card sales within a specified period of time (Daily, Weekly, Monthly, etc.)
- Repayment Method: Instead of fixed monthly payments, repayment occurs through a set percentage of credit card receipts. This percentage is agreed upon before the advance is issued.
- Factor Rate: Costs are calculated using a factor rate rather than a traditional interest rate. These rates typically range from 1.1 to 1.6, depending on the lender and the perceived risk associated with the business.
How a Merchant Cash Advance Works
Merchant Cash Advances (MCAs) provide businesses with quick access to capital by advancing funds based on future credit card sales. Repayment is made through a fixed percentage of daily card transactions, allowing the payment amount to fluctuate with the business’s sales volume. This setup offers flexibility, especially for businesses with variable sales patterns.
Funding Process
Businesses begin by applying for an MCA with a reputable lender. Once they sign an agreement, the lender deposits the advance amount directly in their business bank account. This process can be incredibly swift, with funds often available within a few days of application.
- Application and Review: Businesses apply for an MCA by submitting an application along with credit card processing statements and possibly other financial documents. Lenders review these documents to assess the business’s average monthly credit card sales.
- Advance Amount Determination: The amount of money advanced to the business is primarily based on historical credit card sales data. Typically, a lender will offer a sum that can be comfortably repaid within six to twelve months, depending on the lender’s assessment of the business’s sales consistency.
Repayment Terms
- Holdback: The core of MCA repayment is the holdback, a percentage of daily credit card sales agreed upon by the lender and the business. This percentage is automatically deducted from daily sales and continues until the total advance amount, plus fees, is repaid.
- Automatic Deductions: The holdback is withdrawn directly from the business’s bank account via the merchant processing system, making it a seamless process. This means the actual repayment amount varies day-to-day, corresponding with the business’s sale volumes—higher sales mean faster repayment and vice versa.
- Completion of Payment: The cycle continues until the business has repaid the advance amount plus the agreed-upon fees, calculated using the factor rate. There’s no set end date; the repayment term lengthens or shortens depending on the business’s sales performance.
The unique aspect of an MCA lies in its repayment structure, which aligns directly with the business’s cash flow. During periods of high sales, the business pays more each day, speeding up the repayment process. Conversely, during slower periods, the daily repayment amount decreases, easing the financial burden on the business.
How to Qualify for a Merchant Cash Advance
The requirements for a Merchant Cash Advance (MCA) aren’t as strict as those for traditional bank loans. However, there are still some unique qualifications that every business owner should know about before they apply.
Eligibility Requirements
The primary qualification for an MCA is a consistent volume of credit card transactions. Here’s what lenders typically look for:
- Revenue: Businesses must show a steady monthly cash flow, generally around $40,000 or more per month.
- Business History: This requirement varies from lender to lender. National Business Capital requires at least 1 year in business for all financing options except accounts receivable financing.
- Credit History: Although less stringent than traditional loans, some MCA providers still check the business owner’s credit score. A score of 500 or higher is commonly acceptable. Credit history matters less than revenue for MCAs because of the revenue-driven repayment process.
Overview of the Application Process
Applying for an MCA is generally faster and more straightforward than applying for other business financing options. Here’s an overview of what to expect:
- Application Submission: You’ll need to fill out an application form, usually online, with details about your business and your personal information.
- Document Submission: You will be asked to submit various documents, including recent credit card processing statements, bank statements, proof of business ownership, and possibly tax returns. These documents help lenders analyze your business’s financial health and gauge the risk of lending to you.
- Approval and Funding: Once your application and documents are reviewed, decisions can be made swiftly, often within a few days. If approved, the funds are deposited directly into your business bank account.
Pros and Cons of Merchant Cash Advances
Merchant Cash Advances (MCAs) are a unique financing solution catering specifically to businesses with strong revenue streams. With less focus on credit scores, a wider variety of businesses can leverage this tool to access capital.
But, like all financial tools, MCAs come with their own set of advantages and disadvantages that must be carefully weighed before a business decides to proceed. Understanding these can help business owners make informed decisions that align with their financial strategies.
| Pros | Cons |
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Companies should weigh the possible long-term effects as well as the instant advantages before choosing an MCA. Business owners must project their cash flows and evaluate if they can manage the MCA’s cost and repayment schedule.
Comparing MCAs Against Other Business Financing Options
Merchant cash advances are powerful resources for businesses, but they aren’t the only option available. It’s important to compare MCAs against other financing options before making a final decision to ensure it’s the best fit for your company.
| Type of Financing | Description |
| Traditional Bank Loans | Offers lower interest rates and fixed repayment schedules, ideal for businesses with strong credit histories.
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| Business Lines of Credit | Flexible credit facility that businesses can draw funds from as needed.
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| SBA Loans | Backed by the U.S. Small Business Administration, offering some of the lowest interest rates.
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| Invoice Financing | Allows businesses to receive immediate cash by selling their outstanding invoices at a discount.
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| Equipment Financing | Provides funds specifically for purchasing equipment, often securing the equipment itself as collateral.
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| Asset-Based Lending | Loans given based on the collateral of company assets like real estate, inventory, or receivables.
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When selecting the right financing type, consider these factors:
- Cost-Effectiveness: Look at the total cost of capital, including rates and fees.
- Repayment Flexibility: Assess how repayment terms align with your business’s cash flow.
- Funding Speed: Identify how quickly you need funds, which varies between options.
- Documentation and Approval Process: Consider the effort and time required for the application process.
Best Practices for Using a Merchant Cash Advance
To effectively use a Merchant Cash Advance, you must plan strategically and understand your company’s financial dynamics. Here are some best practices to ensure that an MCA is a valuable financial tool rather than a burden.
- Clear Purpose for Funds: Before securing an MCA, define a clear and strategic purpose for the funds. Whether it’s for buying inventory, funding a marketing campaign, or bridging a cash flow gap, having a specific objective helps to maximize the impact of the advance and ensures the money is used effectively.
- Understand the Costs: MCAs can be more expensive than other forms of financing. It’s vital to fully understand the terms, including the factor rate and the holdback percentage. Calculate the total cost of the advance and how it will impact your daily cash flow, ensuring it’s a viable option for your business’s financial health.
- Plan for Repayment: Align the repayment schedule with your cash flow forecast. Since MCA repayments are a percentage of daily sales, consider how seasonal fluctuations in revenue might affect your ability to repay. Planning for these variations can prevent cash flow issues.
- Monitor Cash Flow Closely: Regularly monitoring your business’s cash flow is crucial when repaying an MCA. This vigilance helps in managing daily deductions and ensures that your business maintains enough liquidity to operate effectively without disrupting service or production.
- Avoid Stacking Advances: While it may be tempting to take out multiple MCAs, this practice, known as stacking, can lead to unsustainable debt levels. If one MCA is not sufficient to meet your needs, reassess your financial strategy or consider other financing options that might be more suitable.
- Consult Financial Advisors: Before applying for an MCA, consult with a financial advisor to explore all available funding options. An advisor can provide insights into the most cost-effective and least disruptive financing strategies for your specific business situation.
Always treat an MCA as a short-term financing solution. It’s best used when you are confident that the influx of capital will generate a return that outweighs the cost of the advance. If used responsibly, an MCA can be an excellent tool for managing cash flow and driving growth.
Find Best-Fit Capital with National Business Capital
Merchant Cash Advances (MCAs) provide a flexible and expedient financial solution for businesses that require quick access to capital and have a strong revenue. MCAs are uniquely suited to meet the needs of businesses looking for funding without the rigorous requirements or fixed repayment schedules of traditional loans. Still, it’s important to approach this option with a comprehensive understanding of both the advantages and potential drawbacks.
As always, the team at National Business Capital is here to guide you through the process, offering expert advice and tailored solutions to help you navigate your business’s financial landscape effectively. Whether you’re considering an MCA or any other type of financing, our advisors are committed to helping you find the right strategy to propel your business forward.
Don’t hesitate to reach out. Unlock the options your company qualifies for by completing our digital application. If you’d prefer to speak with one of our advisors before applying, give us a call at (888) 488-4769.
Frequently Asked Questions
What Is a Factor Rate?
A factor rate is the fee charged by an MCA provider, expressed as a decimal such as 1.2 or 1.5, which indicates that you will pay 20% or 50%, respectively, on top of the borrowed amount.
How Do I Calculate What I'll Pay for My Merchant Cash Advance?
To calculate the total cost, multiply the amount borrowed by the factor rate. For example, if you borrow $25,000 with a factor rate of 1.5, you will end up paying a total of $37,500.
What Are the Repayment Methods for MCAs?
There are three common repayment methods for MCAs:
- Split Withholding: The credit card processor splits your daily credit card receipts between your business and the MCA provider.
- Lockbox or Bank Withholding: A bank handles your credit card sales, splits them, and then sends the agreed portion to the MCA provider, usually causing a one-day delay in funds reaching your account.
- ACH Withdrawal: This method is used when a business doesn’t handle a large volume of credit card transactions. The MCA provider directly withdraws payments from your business bank account.
Will I Have to Switch My Credit Card Processor?
No, switching processors is not always necessary. Providers can use various methods, like lockbox or ACH withdrawal, to manage repayments without requiring a change in your payment processing setup.
Can I Get a Merchant Cash Advance with Poor Credit?
Yes, MCAs are accessible for business owners with less-than-perfect credit scores, as the primary consideration for funding is the volume of credit card sales rather than credit history.
Can I Refinance a Merchant Cash Advance?
Refinancing is possible and can be beneficial if the holdback percentage is impacting your cash flow, although it will not reduce the total cost of the initial advance.
Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.
Phil Fernandes
Phil Fernandes serves as Chief Operating Officer for National Business Capital. He boasts 15 years of experience in sales and 10+ years of management experience as National’s VP of Financing/Analytics. Phil is also an excellent writer who's completed the Applied Business Analytics executive program at MIT and regularly contributes articles to National Business Capital’s blog.
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