Merchant cash advance

A merchant cash advance or MCA is a lump sum of capital lent against a business’s future sales. This is what makes this type of financing an advance and not a loan.

By definition, a business cash advance is short-term and repaid through smaller daily (or weekly) payments until the total cash advance and lender fees are paid in full.

A small business owner can apply for a merchant cash advance and, once approved, have the cash advance deposited into a bank account the same day.

Merchant cash advances work differently depending on the type of advance you choose.

In its traditional form, merchant cash advances are suitable for businesses that deal with large volumes of debit and credit card transactions. Today, the product has evolved into a second program that can benefit any small business.

The difference boils down to how the advance is repaid and how an MCA lender assesses rates and fundability.

Traditional merchant cash advances

In a traditional cash advance agreement, a lender deducts a percentage of your credit or debit card sales on a daily or weekly interval. The process is known as a holdback.

The repayment period typically ranges from 3 to 24 months, though there’s no set-in-stone end date. The higher your credit card sales, the faster you’ll pay the advance off.

Say your lender holds back 15% of your daily credit card and debit card transactions. As your sales rise and fall, so do your MCA payments.

With a merchant cash advance, your payment will shift to the pace of your income, helping you avoid cash flow disruptions when sales are down.

Traditional cash advance requirements

MCA lenders determine advance amounts based on projected credit and debit card sales. Whereas the holdback percentage is calculated on the advance amount and the expected payback time. Typical holdback rates fall within the 10% to 20% range, though this can vary widely based on the business and risk.

ACH merchant cash advances

The second variation of a merchant cash advance is known as an ACH MCA, or an automated clearing house withdrawal.

In this agreement, payments to MCA lenders are fixed and occur over a set term. This means your daily or weekly payment will remain the same regardless of your sales volume. Funds are drawn automatically from a business owner’s linked bank account.

ACH merchant cash advance requirements

ACH advances are based on a business’s total projected revenue, not on credit card or debit card transaction totals alone. As a result, this type of business advance is applicable to all small business owners — not just those with high credit and debit card sales.

Pros

• Quick approval process
• Same-day funding available
• No collateral required
• Most credit scores qualify

Cons

• Higher fees
• Shorter repayment terms
• Daily or weekly repayment frequency

A business that utilizes a merchant cash advance will typically pay back 10% to 30% or more of the amount borrowed. This percentage is known as a factor rate, and it’s most commonly expressed in decimal form. For instance, a factor rate of 10% or 30% would be represented as 1.1 and 1.3, respectively.

Unlike interest that accumulates over time and is a calculation based on depreciating principal, MCA fees are calculated once at the time of origination. The cost is worked into your scheduled payments and is unchanging. If you pay off your advance in 4 months or 12, the total paid remains the same.

To better understand how these rates affect your total payback, let’s look at a few examples:

Advance * Factor Rate = Total Payback Amount

The factor rate you’re quoted will depend on your industry, average monthly sales, the stability of those sales, the time you’ve been in business and other risk factors.

The amount you pay will depend on the program, the amount borrowed and the term. Nowadays, most MCA agreements are of the ACH variety.

Use our ACH merchant cash advance calculator to estimate the total cost of borrowing.

Merchant cash advance providers evaluate risk and weigh credit criteria differently than loan lenders. Unlike traditional financing where personal and business credit scores are more heavily weighed, MCA providers consider the consistency of your historical deposits and average daily balances to determine future revenue and approval amount.

Underwriting criteria of the best merchant cash companies include:

• Industry: Different industries present different levels of risk to MCA providers. For example, sectors that routinely experience periods of high and low sales are riskier for lenders to work with, resulting in potentially higher factor rates.
• Length of time in business: Most MCA lenders require small businesses to be in operation for a minimum of 6 months. Typically, the younger the business, the higher the factor rate.
• Business sales and growth: A merchant cash advance provider will perform a financial assessment of your ability to repay the advance. As MCAs are based on future revenues, showing consistent sales and a proven history of growth bodes well for favorable rates and terms.
• Business credit history:Because an MCA is an advance, your business’s credit score is less of a deciding factor, but it still comes into play. In general, with MCA financing, the better your business credit score, the lower your factor rate.

What you’ll need to qualify:

• 
  Time in business
  4+ months
• 
  Annual revenue
  $100K+
• 
  Credit score
  500+