merchant cash advance
Updated June 03, 2020

Merchant Cash Advance: What Is an MCA and Should I Get One?

Small Business Loans

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If you’ve been having cash flow issues and you need to find a solution fast to keep your small business afloat, you’ve probably come across the idea of a merchant cash advance.

If you’re 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’t — don’t worry. We’ll help you figure out exactly what a merchant cash advance (MCA) is so you can make an informed decision about whether it’s right for your business.

Merchant Cash Advance Basics

Before you decide if an MCA is right for you, you have to understand it a bit better. We’ll 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’s start by saying what an MCA isn’t. It’s 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’ll receive money upfront, and you’ll 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’s 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’re given, you’re 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’re 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’re right for you, or if they’ll be harmful to your long-term business plan rather than helpful.

With an MCA, you’ll 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’re given is based on the company’s perceived risk of giving you that advance. The higher the factor rate, the more you’ll have to pay back to the company.

Let’s say, as an example, you receive a $100,000 advance. How much will you have to pay back? Let’s play with the numbers and see.

  • If you have a factor rate of 1.2, you’ll 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’ll have to pay $150,000.

There is a big difference between paying a total of $120,000 compared to $150,000. That’s why the factor rate you’re given is so crucial.

How much you’re 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’s entirely based on your daily credit card sales, but on average, you’d 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’s 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’t 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 Advance

It’s no secret that MCAs aren’t a good deal because you’ll 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’t Risk Being Homeless

MCA companies can try to get back their losses when your business isn’t 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’t up for grabs if you’re 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’ll Get Money Quickly

If you try to land a traditional loan, you’re 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’ll 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’re using it to make payroll, you might agree to anything to spare yourself the embarrassment of admitting you don’t have enough money to pay everyone on time.

You Don’t Need an Outstanding Credit Score

MCAs 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’t have the best credit. That’s because this segment of business owners don’t 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 Sales

If you’re having an off month, you don’t 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’ll pay less during that time.

That can be attractive for people who don’t want a big payment looming each month, or those who make a lot of seasonal-dependent sales.

You Won’t Face Late Fees Each Month

Since you don’t have to make an installment payment because your payback is based on your sales, you don’t run the risk of missing your payment each month. That means you won’t be subject to the possible monthly late fees you might have with a personal loan.

The Application Process Is Easy

You don’t have to fill out much paperwork when applying for an MCA. That’s a major perk for people who are intimidated by all the paperwork that comes with loans.

Cons of a Merchant Cash Advance

While MCAs do have some silver linings, they also have a few significant drawbacks.

It’s Just a Temporary Band-Aid

If you get to the point where you need an MCA, your business might be in trouble. Unless it’s 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’t be a long-term solution for a flailing business.

They Are Super Costly

Although APRs aren’t 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’ll Have Less Freedom Over Some Business Decisions

The 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’t As Tightly Regulated As Loans

MCAs don’t face as many regulations as the heavily-watched loan industry does. Since MCAs aren’t considered a loan, they don’t 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 Score

Some business owners turn to MCAs because of their poor credit scores. But they don’t 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 Advance

Interested in getting an MCA but aren’t sure about the steps you’ll have to take? Here’s what you’ll have to do.

Step 1: Do Your Research

There 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 Form

Generally, this should be an easy process. It won’t take long to complete the initial form.

Step 3: Collect and Attach Any Requested Documentation

Some 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 Phase

You’ll have to wait a short while, generally a day or two, to see if you are approved.

Step 5: Reviewing the Agreement

The 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 Agreement

Even though you’ve come this far with the process, you still have the power to say no if you feel the MCA isn’t 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 Money

The money will be deposited in your company’s bank account. Repayment will begin right away.

Alternatives to a Merchant Cash Advance

Not sold on getting an MCA? Don’t worry. There are plenty of other alternatives you can explore.

Trimming the Fat from Your Business

  • trimming the fat from your business
      • Basics: 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’t 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’s just good business to do this. You’ll be improving your business for years to come.
      • Cons: You might have to make some hard decisions.
      • COST

        Little to no cost.

      • TIME REQUIRED

        It will require a small-to-moderate time commitment, depending upon how many changes you dream up and implement.

      • SUCCESS RATE

        Your odds of success depend upon how many cost-cutting measures you make.

    Partnering Up

    • Partnering Up
        • Basics: There’s safety in numbers. Bringing in a partner to your business reduces some of the financial strain you’ll be feeling. If they buy into your business with a lump sum, you might not need that MCA.
        • Pros: You’ll 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.
        • COST

          The 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 REQUIRED

          This solution doesn’t require much time at all.

        • SUCCESS RATE

          If you find the right partner, this idea is a slam dunk.

      Asking for Help from Family

      • Asking for Help from Family
          • Basics: 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.
          • COST

            No cost to you, but you could save a lot of money over time.

          • TIME REQUIRED

            Just the amount of time it takes you to work out the deal.

          • SUCCESS RATE

            That depends on your family’s wealth, how much they trust you, and if they are willing to take a gamble on your business.

        Get a Personal Loan

        • get a personal loan
            • Basics: 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.
            • COST

              You can apply for free and examine what the terms will cost you if you accept the agreement.

            • TIME REQUIRED

              In the time it takes you to watch a television show, you can have the application process completed.

            • SUCCESS RATE

              If you’ve handled your finances well in the past, your chances of success are pretty high.

          Tapping Home Equity

          • Tapping Home Equity
              • Basics: 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’t 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.
              • COST

                You’ll have to pay the refinancing costs.

              • TIME REQUIRED

                Refinancing a mortgage is a pretty quick process, though you’ll have to arrange for things like a home appraisal and signing the paperwork.

              • SUCCESS RATE

                If you have home equity and a fair credit score, you’ll likely be granted the refinance.

            Frequently Asked Questions

            When people first consider an MCA, there are some common questions that usually come up.

            • 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’re 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’t 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’s bank account, you will determine how to use it. You can use it for things like payroll, business improvements, inventory, or building maintenance. That’s generally up to you.

            • Can I pay off my MCA early?

              You can if you want. But you won’t be saving yourself any money by doing so. If you’ve agreed to repay the advance plus fees, you’ll have to pay the full amount whether you do it in the agreed-upon 12-month timeframe or months earlier. You won’t save yourself any money like you would if you were paying off an installment loan faster.

            Shannon Serpette

            Shannon is a mother of two and an award-winning journalist and freelancer who lives in Illinois. She obtained a bachelor’s degree in English from Illinois Wesleyan University before beginning her 20-year career in newspapers. When she’s not spending time with her children, she is often pursuing her favorite hobbies — running, metal detecting, kayaking, and reading about personal finance.

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