What Is a Merchant Cash Advance?

Definition & Examples of a Merchant Cash Advance

Cashier rings up customer at a gardening store
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A merchant cash advance (MCA) is a type of loan that quickly provides cash for businesses. It's similar to a paycheck advance, except it's for businesses rather than individuals.

Here are the basics of this popular type of small business financing.

What Is a Merchant Cash Advance?

A merchant cash advance offers a cash advance against future sales. This type of financing is generally available to businesses that have a steady volume of credit card sales, including retail stores, restaurants, and medical offices. Businesses receive a lump-sum payment from a lender and then pay it back as they make sales to customers.

  • Alternate name: Business cash advance
  • Acronym: MCA

How Does a Merchant Cash Advance Work?

Getting a merchant cash advance is typically a fairly quick process. If you're approved, you should receive your lump-sum payment within a few business days of applying. Documentation needed during the application process may include:

  • Proof of your identity (such as a state-issued ID)
  • Bank and credit card processing statements
  • Business tax returns

It's a good idea to keep tabs on your credit score—for a lot of reasons. When it comes to merchant cash advances, the lender may run a soft credit check on the owner’s personal credit, so you want to know what the lender may find.

The amount you can get from an MCA ranges from a few thousand dollars to over $200,000. Keep in mind, however, that the payback time is usually very short—18 months or less, in most cases.

To pay the money back, the lender will typically take a percentage of sales, usually on a daily basis. Repayments may come out of your connected merchant account and are calculated based on sales processed through credit or debit card cash register sales. In this case, cash or check sales don’t count toward the daily quota.

Repayments can also be taken directly out of your business bank account via ACH payments. Businesses with lower rates of credit and debit sales may still qualify for MCAs if they use ACH repayments.

What Will It Really Cost?

Figuring out the price for an MCA can be tricky since it’s not based on an interest rate or annual percentage rate (APR). When calculated as an APR, the cost can be significant—usually much more costly than other types of business loans.

Instead of an interest rate, MCAs are based on a factor rate. A common factor rate may fall between 1.2 and 1.4. These rates are applied to your MCA to calculate the total cost of your loan.

For instance, a $25,000 MCA at a factor rate of 1.25 gives you a total repayment amount of $31,250 ($25,000 multiplied by 1.25). The cost of this loan would be $6,250. However, since most MCAs are short-term loans, the APR—which is annualized—would be much larger than a traditional, long-term loan.

Considering the low barrier for approval, an MCA can be a viable option for businesses that need cash quickly. However, an MCA will never be as cheap as a bank loan. Those with good credit, strong revenues, and at least two years in business may qualify for a bank loan or line of credit, which may be a better option than an MCA.

Pros and Cons of the MCA

Pros
  • Flexibility

  • Quick and easy application process

  • No collateral

Cons
  • High costs compared to other loans

  • Potential cash flow problems

  • Might need to change merchant processors

Pros Explained

  • Flexibility: There's a lot of flexibility with MCAs. You can use the funds as you see fit, and you have a lot of options for payment plans. If your repayment plan is based on a percentage of daily sales, for instance, you don’t have to repay as much when sales are low. This can be especially helpful to businesses with fluctuating sales, such as retailers that depend on seasonal sales.
  • Quick and easy application process: The perks of this type of funding are that you can usually get your money quickly—in as little as a day or two—and it can be easy to qualify. Your credit history is less important than your sales history. If you can demonstrate that you have a certain volume in credit or debit card sales over the past year, you likely have what you need to qualify for an MCA.
  • No collateral: These loans are unsecured, which means it doesn't tie up any of your existing assets as collateral for the loan. For businesses with limited assets, this can be a major perk.

Cons Explained

  • High costs compared to other loans: The cost to get a merchant cash advance is much higher than many other types of funding. Costs are almost always described as factor rates, not interest rates. A factor rate differs from interest in that it’s not based on a specific time period. Paying off the advance more quickly won’t save you money, for example, in the same way that paying off a credit card faster will save you money on interest.
  • Potential cash flow problems: The biggest risk of an MCA is that a chunk of your future sales will go toward repaying the advance and associated costs. This can result in cash flow problems that can place your business deeper in debt and force it to borrow again.
  • Might need to change merchant processors: The advance will be linked to your merchant processing account so that payments come off the top of sales. You may be required to change merchant processors to qualify, and it may be difficult to leave your merchant processor until the money is paid back. If you find yourself unhappy with your current card fees and services, you may have to wait until the money is paid in full before you switch.

Key Takeaways

  • A merchant cash advance (MCA) is a lump-sum, short-term loan to businesses.
  • The benefit of MCAs is that they're flexible loans that are easy to qualify for and quickly put money in the hands of businesses.
  • The downside to MCAs is that they often come with high costs, compared to other forms of business loans.