A merchant cash advance (MCA) is funding provided by your lender in exchange for a portion of your credit or debit card sales. This is a great option for businesses looking for fast and easy funding with flexible qualifications.
Cash is readily available
No limitations on purchases
Quick payback
Easy to qualify
Higher payments
Collateral may be required
With an MCA, a lender advances you a set amount of capital. Daily payments are then drawn from your merchant sales each day until your total amount, including your lender’s rates, are paid in full. Merchant cash advances are not loan products, however, they do provide the same benefits for small businesses of any kind.
MCAs have previously been known as the funding option for businesses with financial limitations. Recently, they have evolved into programs that can benefit any small business. To help you better understand how a merchant cash advance works, let’s break down a typical program:
Merchant cash advances have flexible requirements providing more accessibility to small businesses. If your business has had trouble qualifying for additional capital, an MCA can help you obtain the financing you need.
Known for their speed and convenience, MCAs are a great option if you’re looking for quick funding. The application and underwriting process is streamlined, giving you the opportunity to apply, qualify and receive funding, sometimes as soon as the same day you apply. If you run into an emergency expense or are pressed for time, an MCA can help you avoid waiting weeks (even months) for the capital you need today.
What separates merchant advance funding from a traditional business loan is its payment structure. Rather than making fixed monthly payments over the course of the term provided, a merchant cash advance is paid in small increments each day. You can make payments towards your MCA in two ways:
Lenders can draw payments directly from your credit card sales each day, according to an agreed percentage. While a daily payment may seem overwhelming to your cash flow, it will correlate with your sales.
With a merchant cash advance, your payment will shift to the pace of your income, helping you avoid cash flow disruptions when your sales are short.
Here’s an example of how your fluctuating sales can influence your payments:
| Merchant Sales | Holdback* |
$1,000 |
$170.00 |
$750 |
$127.50 |
$500 |
$85.00 |
*Based on a 17% holdback rate
Referring to the table above, you can see how your payment can significantly change as your income rises and falls. Relying on credit card holdbacks can help continue payment during your slow seasons without limiting your much-needed working capital.
These holdbacks not only help your business when you experience a decrease in sales, but it also allows you to pay more towards your balance when sales exceed expectations.
Rather than having your lender draw payments from your merchant sales, lenders could draw straight from your debit card/checking account.
Fixed daily payments of this kind would work for businesses who have more debit card sales since the payment is drawn from your bank account.
Your payment will not fluctuate with this kind of MCA, making it easier for you to make financial plans.
Merchant cash advances are viable funding options for many business owners, including those with credit and business revenue challenges. If you’re interested in a merchant cash advance, you should ask yourself the following questions:
Most businesses are drawn to MCAs due to their flexible requirements. However, you should research different lenders and their varying qualifications.
Merchant cash advances are one of the most convenient funding options available to small businesses. In most cases, they are almost always fulfilled online. An online merchant cash advance application will take only minutes to complete, asking you to share general business details and contact information about you and your company.
In addition to your online application, some lenders may ask for recent bank statements or to connect your bank directly to the application. This will help your lender gain a better understanding of your financial health and what you can afford.
MCAs can be used for just about anything and can help you handle any financial hurdle you may encounter. When your business receives an MCA, you can use it any way you see fit to benefit your growth. Consider some of these possible scenarios:
If your business lacks working capital, a merchant cash advance can replenish the funds you need for daily operations. Whether you’re waiting on an invoice payment or dealing with a seasonal lull, an MCA can get you through these unsettling times.
Unexpected expenses can burden your business when you don’t have additional working capital. The speed of a merchant cash advance can quickly tackle those financial hardships you didn’t see coming.
When your business gets the opportunity to fulfill a large purchase order or take on a new client, it can require more capital than you have available. A merchant cash advance can help you achieve the return-on-investment your business needs to grow, without disrupting your cash flow.
Your lender will not include the typical interest rate that is associated with a business loan. Instead, your lender will apply a factor rate to your merchant cash advance. If you’re unfamiliar with factor rates, you’re not the only one.
A factor rate is another way lenders add costs to the funds they provide. With a merchant cash advance, the cost of funding is added to your program at the very beginning, unlike interest and APR rates that annualize over time.
To better understand how these rates will affect your total payback, let’s look into a few examples:
| MCA Amount | Factor Rate | Total Payback |
$10,000 |
1.15 |
$11,500 |
$50,000 |
1.18 |
$59,000 |
$100,000 |
1.20 |
$120,000 |
As you can see from the table above, factor rates are expressed as a decimal rather than a typical percentage you may be used to. In order to determine your total cost, multiply your factor rate by the total amount of your MCA program.
Factor rates operate much differently compared to interest and APR rates. When searching for funding options, you should understand how each rate functions so you can properly compare the total costs.
Our goal is to find the right funding program that meets your financial needs. Fast Capital 360’s Business Advisors can point you towards the right merchant cash advance to meet your goals without adding any financial burden.
