[{"@context":"https:\/\/schema.org\/","@type":"Article","@id":"https:\/\/moneydoneright.com\/business\/small-business-loans\/merchant-cash-advance\/#Article","mainEntityOfPage":"https:\/\/moneydoneright.com\/business\/small-business-loans\/merchant-cash-advance\/","headline":"Merchant Cash Advance: What Is an MCA and Should I Get One?","name":"Merchant Cash Advance: What Is an MCA and Should I Get One?","description":"If you\u2019ve been having cash flow issues and you need to find a solution...","datePublished":"2020-03-01","dateModified":"2021-10-08","author":{"@type":"Person","@id":"https:\/\/moneydoneright.com\/author\/shannon-serpette\/#Person","name":"Shannon Serpette","url":"https:\/\/moneydoneright.com\/author\/shannon-serpette\/","identifier":63,"image":{"@type":"ImageObject","@id":"https:\/\/secure.gravatar.com\/avatar\/e8497bb70d7dace1eacc262ce2d9add2d2ea01626758283a5a9529a519b0862b?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/e8497bb70d7dace1eacc262ce2d9add2d2ea01626758283a5a9529a519b0862b?s=96&d=mm&r=g","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Money Done Right","logo":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","width":488,"height":60}},"image":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/merchant-cash-advance.jpg","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/merchant-cash-advance.jpg","height":460,"width":1900},"url":"https:\/\/moneydoneright.com\/business\/small-business-loans\/merchant-cash-advance\/","about":["Small Business Loans"],"wordCount":2947,"keywords":["schema"],"articleBody":"If you\u2019ve been having cash flow issues and you need to find a solution fast to keep your small business afloat, you\u2019ve probably come across the idea of a merchant cash advance.If you\u2019re having trouble understanding the concept, or your eyes glazed over after five minutes of reading terms everyone apparently thinks you should know, but you don\u2019t — don\u2019t worry. We\u2019ll help you figure out exactly what a merchant cash advance (MCA) is so you can make an informed decision about whether it\u2019s right for your business.Table of ContentsToggleMerchant Cash Advance BasicsPros of a Merchant Cash AdvanceCons of a Merchant Cash AdvanceHow to Get a Merchant Cash AdvanceAlternatives to a Merchant Cash AdvanceFrequently Asked QuestionsMerchant Cash Advance BasicsBefore you decide if an MCA is right for you, you have to understand it a bit better. We\u2019ll try to make this as painless as possible for you by breaking down MCAs into understandable language.What Is a Merchant Cash Advance?First off, let\u2019s start by saying what an MCA isn\u2019t. It\u2019s not a loan, no matter how much it sounds like a loan or how many people present it as a loan. With a loan, you\u2019ll receive money upfront, and you\u2019ll be assigned terms, such as an annual percentage rate, a monthly due date, and a regular installment payment amount.An MCA will give you money upfront, just as a loan will. But that\u2019s where the similarities end. Rather than acting as a loan, an MCA is more like a cash advance based upon the future credit card sales of your business.In exchange for the money you\u2019re given, you\u2019re promising to pay that money back, as well as any fees, by giving the MCA company a portion of your credit card sales you make each day. The amount you will pay each day depends upon the factor rate you\u2019re assigned and how much you generate in sales.Who Is a Merchant Cash Advance For?An MCA can be obtained by small business owners. Those who consider them are usually pretty desperate for fast cash.Typically, these business owners need the money in a hurry for things like making payroll, buying more inventory, purchasing needed equipment, or covering building expenses.How Do Merchant Cash Advances Work?Understanding how MCAs work is a key factor in deciding whether they\u2019re right for you, or if they\u2019ll be harmful to your long-term business plan rather than helpful.With an MCA, you\u2019ll be given a lump sum advance as well as a factor rate by the MCA company. The factor rate is generally in the ballpark of 1.1 to 1.6, although it can be lower or higher in certain circumstances and depending upon the company you choose to do business with.The factor rate you\u2019re given is based on the company\u2019s perceived risk of giving you that advance. The higher the factor rate, the more you\u2019ll have to pay back to the company.Let\u2019s say, as an example, you receive a $100,000 advance. How much will you have to pay back? Let\u2019s play with the numbers and see.If you have a factor rate of 1.2, you\u2019ll pay $120,000.Those with a factor rate of 1.3 will pay $130,000.A factor rate of 1.4 will result in a payback amount of $140,000.If you have a factor rate of 1.5, you\u2019ll have to pay $150,000.There is a big difference between paying a total of $120,000 compared to $150,000. That\u2019s why the factor rate you\u2019re given is so crucial.How much you\u2019re expected to pay per day will vary depending upon the term length of your MCA and what percentage of your sales the MCA company keeps each day.If you have a nine-month agreement and your advance is $100,000 with a factor rate of 1.4, you can expect to have to make average daily payments in the $740 range. That\u2019s entirely based on your daily credit card sales, but on average, you\u2019d have to make daily payments of $740 toward your cash advance to dig yourself out in approximately nine months.If the MCA company gives you a holdback percentage of, let\u2019s say, 15 percent of your sales, that means for every $1,000 in sales you have, $150 of that money would be sent straight to your MCA company.If you were trying to cover an estimated daily payment of $740, you would need to make about $5,000 in sales every day. If you consistently have less, your grand total wouldn\u2019t be paid off within your nine-month window. If you consistently have more than that in sales, you would pay it off sooner.Pros of a Merchant Cash AdvanceIt\u2019s no secret that MCAs aren\u2019t a good deal because you\u2019ll have to pay back way more generally with this funding option than you will with any other. So why would anyone take one out? They do have some good things about them that make them attractive to a certain subset of business owners.You Don\u2019t Risk Being HomelessMCA companies can try to get back their losses when your business isn\u2019t doing well and you are at risk of not paying them back. But, unlike a personal loan where you might have to put up your personal residence as collateral, MCAs are typically unsecured. That means your home isn\u2019t up for grabs if you\u2019re having issues repaying.One way MCA companies may try to get around this, though, is by asking you to sign a personal guarantee, which says that paying back the advance is your responsibility. Not all MCA companies require this guarantee, though — do your homework before you sign.You\u2019ll Get Money QuicklyIf you try to land a traditional loan, you\u2019re going to be waiting for a while. Brick and mortar banks are starting to get faster about issuing loans, thanks to the competition from online lenders. But even still, you have a lot of red tape to get through as bank officials determine if your business is too much of a risk.You may have to wait weeks for a traditional bank to decide if they\u2019ll take a gamble on you. For online lenders if you pursue a personal loan, the process is much faster, but it can still take days in some cases.With some MCAs, you can have the money in as little as a day. And if you\u2019re using it to make payroll, you might agree to anything to spare yourself the embarrassment of admitting you don\u2019t have enough money to pay everyone on time.You Don\u2019t Need an Outstanding Credit ScoreMCAs generate a lot of money for companies. MCA companies know their best bet for landing a customer is opening up MCAs to business owners who don\u2019t have the best credit. That\u2019s because this segment of business owners don\u2019t have a lot of other options when they need money fast.If you have poor credit, a merchant cash advance can provide the temporary relief you need.The Payments Are Based on Your SalesIf you\u2019re having an off month, you don\u2019t have to worry about making a huge installment payment that never fluctuates, even if your sales have been non-existent for a few days. MCAs only take a percentage of your sales, and if those are slow, you\u2019ll pay less during that time.That can be attractive for people who don\u2019t want a big payment looming each month, or those who make a lot of seasonal-dependent sales.You Won\u2019t Face Late Fees Each MonthSince you don\u2019t have to make an installment payment because your payback is based on your sales, you don\u2019t run the risk of missing your payment each month. That means you won\u2019t be subject to the possible monthly late fees you might have with a personal loan.The Application Process Is EasyYou don\u2019t have to fill out much paperwork when applying for an MCA. That\u2019s a major perk for people who are intimidated by all the paperwork that comes with loans.Cons of a Merchant Cash AdvanceWhile MCAs do have some silver linings, they also have a few significant drawbacks.It\u2019s Just a Temporary Band-AidIf you get to the point where you need an MCA, your business might be in trouble. Unless it\u2019s a one-time fluke, you might need to keep slapping Band-Aids on your business in the future with additional costly MCAs.An MCA won\u2019t be a long-term solution for a flailing business.They Are Super CostlyAlthough APRs aren\u2019t disclosed for MCAs, when calculated in retrospect, they can easily reach triple digits. Personal loans are far more cost-effective if the small business owner qualifies for them.You\u2019ll Have Less Freedom Over Some Business DecisionsThe terms of your MCA agreement may temporarily stop you from making decisions that are in the best interest of your business. If, for instance, you learned it was more profitable to change to another credit card processing company, there may be a clause in your agreement preventing you from making the switch.MCAs Aren\u2019t As Tightly Regulated As LoansMCAs don\u2019t face as many regulations as the heavily-watched loan industry does. Since MCAs aren\u2019t considered a loan, they don\u2019t have to abide by the same laws that loans do. That can be risky for business owners who may not understand what they are getting into.They Can Hurt Your Credit ScoreSome business owners turn to MCAs because of their poor credit scores. But they don\u2019t realize that, depending on the MCA company, the application might result in a hard pull on their credit score. That can lower their credit score, although most of the damage is gone after about 90 days.How to Get a Merchant Cash AdvanceInterested in getting an MCA but aren\u2019t sure about the steps you\u2019ll have to take? Here\u2019s what you\u2019ll have to do.Step 1: Do Your ResearchThere are a lot of MCA companies to choose from out there. Look at their websites, read the fine print, and pay attention to any reviews from prior customers. If a company consistently gets bad ratings, run in the other direction and find a different company.Step 2: Fill Out the Online Application FormGenerally, this should be an easy process. It won\u2019t take long to complete the initial form.Step 3: Collect and Attach Any Requested DocumentationSome things you can expect to provide include your business tax ID number, business and personal bank statements, and documentation showing your weekly or monthly credit card sales.Step 4: The Waiting PhaseYou\u2019ll have to wait a short while, generally a day or two, to see if you are approved.Step 5: Reviewing the AgreementThe MCA company will send you an agreement to look over. Pay special attention to things like your factor rate, the payback period, whether they require you to sign a personal guarantee, and any other fine print.Read the whole document from start to finish. After that, you should play with the numbers a bit and look honestly at how the MCA, if accepted, would impact your business.Step 6: Accept or Decline the AgreementEven though you\u2019ve come this far with the process, you still have the power to say no if you feel the MCA isn\u2019t in your best interest. If you want to go ahead with it, agree to the contract. You may need to begin using a new credit card processor, but that will depend upon your MCA company.Step 7: Receive the MoneyThe money will be deposited in your company\u2019s bank account. Repayment will begin right away.Alternatives to a Merchant Cash AdvanceNot sold on getting an MCA? Don\u2019t worry. There are plenty of other alternatives you can explore.Trimming the Fat from Your Business\t    \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tBasics: Being a boss is never easy. Before you get roped into an MCA, figure out if there are ways to make your business more profitable. Maybe you won\u2019t need an advance at all if you can implement enough money-saving changes, like cutting staff, subleasing part of your business building, and saving on other expenses. Pros: It\u2019s just good business to do this. You\u2019ll be improving your business for years to come.Cons: You might have to make some hard decisions.\t\t\t\t\t\t\tCOSTLittle to no cost.TIME REQUIREDIt will require a small-to-moderate time commitment, depending upon how many changes you dream up and implement. SUCCESS RATEYour odds of success depend upon how many cost-cutting measures you make.\t\t\t\tPartnering Up\t    \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tBasics: There\u2019s safety in numbers. Bringing in a partner to your business reduces some of the financial strain you\u2019ll be feeling. If they buy into your business with a lump sum, you might not need that MCA. Pros: You\u2019ll no longer feel like the weight of the world is on your shoulders. You can split up the work and the responsibilities of the job, and maybe even take some time off. Cons: You and your partner might not agree on the future path the business should take. \t\t\t\t\t\t\tCOSTThe only cost you might have is drafting up a legal document showing joint ownership of the business. But you will also have to share future profits. TIME REQUIREDThis solution doesn\u2019t require much time at all.SUCCESS RATEIf you find the right partner, this idea is a slam dunk. \t\t\t\tAsking for Help from Family\t    \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tBasics: If your family is relatively wealthy, why not ask them to invest in your business? They could become silent backers and you could pay them back, with interest, over time. Pros: You can get a much more attractive interest rate with family than you can through an MCA.Cons: Your pride might take a hit -- you might feel a little embarrassed to ask family for money. You also risk damaging your relationship with that relative if the venture fails. \t\t\t\t\t\t\tCOSTNo cost to you, but you could save a lot of money over time. TIME REQUIREDJust the amount of time it takes you to work out the deal. SUCCESS RATEThat depends on your family\u2019s wealth, how much they trust you, and if they are willing to take a gamble on your business. \t\t\t\tGet a Personal Loan\t    \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tBasics: Instead of getting an MCA, you could apply for a personal loan. Pros: It would be cheaper for you to pay back than an MCA would. Cons: Your application might not be accepted if you have poor credit.\t\t\t\t\t\t\tCOSTYou can apply for free and examine what the terms will cost you if you accept the agreement.TIME REQUIREDIn the time it takes you to watch a television show, you can have the application process completed.SUCCESS RATEIf you\u2019ve handled your finances well in the past, your chances of success are pretty high.\t\t\t\tTapping Home Equity\t    \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tBasics: If you have been a homeowner for a while, made a sizeable down payment, or have seen a big increase in your home property value, you could use your home equity to keep your business afloat. Pros: If you refinance and take the equity in cash, you won\u2019t be saddled with a monthly loan payment, other than the mortgage you were already paying.Cons: Refinancing for another 20 or 30 years can be a big blow to your retirement plans if you are already in your 40s or 50s.\t\t\t\t\t\t\tCOSTYou\u2019ll have to pay the refinancing costs. TIME REQUIREDRefinancing a mortgage is a pretty quick process, though you\u2019ll have to arrange for things like a home appraisal and signing the paperwork. SUCCESS RATEIf you have home equity and a fair credit score, you\u2019ll likely be granted the refinance. \t\t\t\tFrequently Asked QuestionsWhen people first consider an MCA, there are some common questions that usually come up..accordion-list .accordion-title:hover{color: #4db848;}How long are the repayment periods?Generally, most companies have a timeframe of three to 18 months in which they want to have the advance and fees paid back. How much of a holdback percentage do most companies required?The holdback percentage is how much the MCA company will keep from each credit card payment your business receives. The percentage will depend upon the MCA company you\u2019re considering and other factors such as your typical daily credit card sales. But, usually, most companies institute a holdback percentage of anywhere from 10 percent to 20 percent. How long does it take to get the money?Money from an MCA can be received within one business day of applying and accepting the contract. It isn\u2019t always that fast, though. Sometimes it can take up to 5 days instead. You can influence how quickly you get the advance by responding to inquiries or documentation requests quickly.Will the MCA company determine how the money can be used?Once the advance is deposited in your company\u2019s bank account, you will determine how to use it. You can use it for things like payroll, business improvements, inventory, or building maintenance. That\u2019s generally up to you.Can I pay off my MCA early?You can if you want. But you won\u2019t be saving yourself any money by doing so. If you\u2019ve agreed to repay the advance plus fees, you\u2019ll have to pay the full amount whether you do it in the agreed-upon 12-month timeframe or months earlier. You won\u2019t save yourself any money like you would if you were paying off an installment loan faster. 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