Merchant Cash Advance
A Merchant Cash Advance (also known as MCA funding) is a way for businesses to get quick access to cash that will pay back through credit card transactions the company performs. If you need a commercial working capital for your company, an MCA might be a winning option.
What Do You Need to Qualify?
- 1+ Year in Business
- $500,000+ in Annual Revenue
What Is a Merchant Cash Advance?
A merchant cash advance or MCA is short-term financing given by a specialized lender (merchant cash advance companies) to small business owners and their companies to cover financial and business needs. A merchant cash advance is technically not a loan, it’s known as alternative business funding and not covered by the same rules and regulations as other types of financing such as a short-term loan from a conventional bank, small business loan, or term loan.
An MCA is designed for business owners and companies that have bad credit histories or no business credit established. MCAs are typically referred to as alternative small business financing. As a funding option, an MCA has pros and cons versus traditional bank loans.
The proceeds of an MCA and repayment of the cash advance are generally based on historical credit card or debit card sales; and future credit card/debit card receivables. Put simply, a lender or MCA providers advance a business owner a lump sum amount of cash based on an anticipated amount of credit card or debit card sales from the business operations. The business owner agrees to pay back the advanced amount, plus a fee from a portion of future credit card transactions over a specified period of time. The repayment is typically drawn directly from the business owner’s card processing merchant account daily or weekly.
The purpose of a merchant cash advance is to accelerate the business owner’s cash flow. However, because the business owner will have to use future credit card sales revenue to repay the cash advance, an MCA will reduce future cash flow for the business.
It’s important to understand that business cash advances are among the costliest forms of business financing and should be used with care and a full understanding of costs and repayment terms. Many financial advisors are in agreement that a merchant cash advance should be used as a last resort by business owners because of the high costs involved. MCAs may seem like fast, easy money, but don’t let the simplicity fool you, these loans are very costly.
A merchant cash advance may involve one or more fees for the funds that are advanced to a business. These fees (including factor rate) are not expressed as interest rates or APR like conventional loans. This often causes confusion and misunderstanding of the costs associated with the MCA financing. Below we will discuss the types of businesses and business cases that are suitable for this type of business financing.
Is a MCA the same as Invoice Financing or Invoice Factoring?
No. While somewhat similar, invoice factoring looks at future receivables that have already been invoiced by the business to customers. Invoice financing is based on current accounts receivables that are booked by a business. A merchant cash advance looks at historical credit card sales of a business and uses that information to project future credit card sales to determine the amount of the advance and repayment terms.
What types of businesses should use a Merchant Cash Advance?
As described above, an MCA is designed to accelerate cash flow for business owners. In addition, merchant cash advances are structured to service businesses that make a high volume of credit card sales. So, the first criteria for qualifying for an MCA is that the business accepts credit cards and/or debit cards.
As previously noted, a merchant cash advance is a costly financing option. Therefore, an MCA should be used with care and proper planning. Because MCAs do not take into account the business owner’s credit profile, they are easier to qualify for than conventional loans which makes them attractive to business owners who need fast cash. So, there is a need to balance the need for cash and how to cover the high cost of this type of financing.
Understanding the dynamics of how an MCA will affect future cash flow will help you understand how to use this type of financing and if it’s right for your business. In general terms, a merchant cash advance may be best suitable for businesses that have seasonal cycles such as ski resorts, beach resorts, restaurants, caterers, retail businesses, home improvement, lawn, and pool care, and many more industry types that are affected by seasonality. In the periods between your peak season(s), you may require additional working capital. You may need to hire staff, purchase inventory, advertise, upgrade equipment, etc. It is therefore critical that you time your merchant cash advance so that your future cards sales revenue is enough to cover repayment costs of the MCA repayment terms.
Other reasons to take an MCA may be to take advantage of immediate deep discounts on inventory or to take advantage of special limited-time opportunities. Of course, if there is severe financial hardship and there is no alternative, a merchant cash advance may be the last-resort option.
It is important to ensure that your business will experience higher or stable future card sales volumes in order to effectively pay off the advance in a timely manner. The risk is that your business cannot meet the repayment requirements and that may result in the need for an additional cash advance. This is commonly referred to as a debt trap. In Annual Percentage Rate (APR) terms, a merchant cash advance could be as high as 350%.
Whatever the industry, an MCA could be a fast, quick way to get funding, but should always be the last resort bridge to keep your business going and it should be used sparingly.
How a Merchant Cash Advance works?
Calculating the cost of financing. Unlike a conventional loan that relies on an interest rate and time to calculate the cost of financing, an MCA will use a factor rate to determine the cost of the cash advance. While the interest rate is expressed as a percentage (i.e., 20%), a factor rate is expressed as a whole number and a fraction (i.e., 1.4). To determine the total cost associated with a factor rate you simply multiply the factor rate by the amount of the cash advance, plus any other fees and the result is the payback amount. So, if your company gets a $20,000 cash advance that has a factor rate of 1.4 and $500 in fees, you calculate the cost as follows. $20,000 x 1.4 = $28,000 + $500 = $28,500. Therefore, the cost of the cash advance is $8,500 and the amount owed is $28,500.
MCA Repayment terms and structure:
With a conventional bank loan, the loan amount and interest are typically paid with fixed monthly payments over a set period of time. With a merchant cash advance the lender will take a percentage of the future credit card receipts or debit card sales until the total repayment amount is repaid. Keep in mind that the full amount is owed in the case of an MCA regardless of how quickly it is paid-off; whereas with a conventional loan if you pay-off the principal amount (assuming no prepayment penalties), you will lower your overall cost because you no longer pay interest on the loan.
Examining the Pros and Cons of a Merchant Cash Advance:
Pros of a Merchant Cash Advance:
- Personal credit score not considered – since the cash advance is based on actual sales, merchant cash advance providers typically will not ask for a credit report or submit an inquiry to the credit bureaus,
- Easy application process – applications are usually done online with some supporting documentation such as bank account (business bank account) information (bank statements) and/or access to your credit card processing merchant account required,
- Fast decisions – application usually are processed with days, up to one week before receiving your funds,
- No collateral required – most MCAs are unsecured and rely on proceeds from credit card payments. However, some MCAs may ask for a personal guarantee. Be sure to check the fine print before signing.
Cons of a Merchant Cash Advance:
- High cost of financing – As shown above, typical Annual Percentage Rate could be well into the triple digits.
No fixed payment – so if your sales are higher, your payments will be higher.
How it Works?
You’re only a few clicks away from the capital you need to reach your full potential.
- Apply Securely Within Minutes Move through our streamlined application within minutes and upload your business documents with zero risk.
- Review Your Offers Compare your offers with expert advice from our team and select the best one for your specific circumstances.
- Get Funded With your money in hand, you can take advantage of opportunities and tackle challenges with confidence.
MCA/Revenue-Based Financing FAQ’s:
MCA or Revenue-based financing is especially helpful for young businesses, start-ups, and operations that haven’t built up enough credit history to qualify for traditional loan products. They’re easily accessible, and funding times work fast, making them a great choice for businesses that need access to short-term capital.
But, revenue-based financing isn’t exclusive to the abovementioned businesses; Anyone can secure this type of financing to meet their goals. Whether you generate $500,000 or $5 million in annual revenue, Global Rapid Funding can help connect you with the right lender for your specific circumstances.
Revenue-based financing is often thought of as a type of business loan, but the laws governing the two are significantly different. With revenue-based financing, the lender is essentially purchasing a percentage of your future sales at a discount.
You will receive an advance on your future revenue, which you’ll repay through a portion of your future revenue stream. Small business loans, on the other hand, involve a company lending you funds in exchange for fixed payments over a set schedule.
Business loans can have repayment terms of up to 25 years, whereas revenue-based financing is designed to be more of a short-term funding solution. Although they don’t come with set repayment terms, most revenue-based financing agreements are repaid within a year or less.
Revenue-based financing tends to have a higher APR compared to traditional business loans, but this is offset by the shorter repayment period. Basically, the structure means you’ll spend less time in debt.
Yes! While having good credit makes it easier and cheaper to secure financing, it’s still possible to reach an approval with a less-than-favourable credit score. In fact, many online lenders offer this type of financing with no minimum credit score requirements.
When you apply for revenue-based financing, your annual revenue and time in business will weigh heavier than your credit score. The structure allows new businesses and those without extensive credit histories to secure the funds they need to grow, but they’re also beneficial for established businesses to access the capital they need to navigate challenges and afford growth opportunities.
Every lender is different, and some may require a high credit score to qualify for revenue-based financing. This is especially common with banks and credit unions, but online lenders are generally the opposite. They’re more likely to consider your revenue, potential for growth, time in business, and other factors rather than your credit score.
Yes! When you apply for revenue-based financing with Global Rapid Funding, you could be eligible to receive funds in as little as 24 hours—or less.
Unlike traditional lenders, Global Rapid Funding is a FinTech marketplace that allows you to receive multiple, competitive offers with one digital application. Our expert Business Finance Advisors work with you every step of the way, advising you on which opportunities would be the best fit for your specific circumstances.
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Themesflat.
Founder & CEO, Arcade Systems
Sed ut perspiciatis unde omnis iste natus voluptatem accusantium doloremque laudantium, totam rem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae
Themesflat.
Founder & CEO, Arcade Systems