A merchant cash advance, or MCA for short, allows you to get an advance on your credit card sales. However, it is one of the most expensive forms of financing available, with annual percentage rates (APRs) regularly exceeding 100%, which is why we recommend it only as a last resort.
MCAs can be a good option for your business if you are in dire need of additional money and have no other means of access to funds but have a large amount of credit card sales. You can get a lump sum of funds issued to you, with daily repayments based on a percentage of your credit card sales.
If you are considering an MCA, we recommend working with a provider like Clarify Capital. It offers multiple loan options in addition to MCAs, such as working capital loans and credit lines, and provides guidance as to the best financing option for your circumstances.
Pros & Cons of a Merchant Cash Advance
| PROS | CONS |
|---|---|
| Fast funding speeds | Very expensive form of financing |
| Easy qualification requirements | Repayment amounts can fluctuate based on credit card sales |
| Required repayment amounts can decrease if you have a slow month in sales | Requires daily repayments |
Example of How a Merchant Cash Advance Works
To illustrate the fees and costs associated with an MCA, how it works, and why it should generally be considered a last resort for financing, we’ve provided an MCA sample financing request below.
Compared to traditional loans, MCAs may use terminology you’re unfamiliar with, so we’ve also included relevant definitions:
- Factor rate: This is the amount a lender charges you for advancing funds on an MCA. Multiplying the factor rate by your loan amount gives you the total repayment amount for the advance.
- Holdback percentage: This is the percentage of daily credit card receivables used to repay the advance.
As you can see from the example above, an MCA is an expensive form of financing. With a fairly typical factor rate of 1.20x, an advance of $100,000 would have cost your business $20,000 in fees over a period of three months. You can use our merchant cash advance calculator to see what the costs would be for your scenario.
Merchant Cash Advance: Rates, Terms & Qualification Requirements
Costs, terms, and qualification requirements can vary depending on the lender you choose and your business credit and finances. However, we’ve summarized typical figures you may see if you decide to shop rates on an MCA.
Typical Rates & Terms | |
Factor Rate | 1.10x to 1.50x times the loan amount |
Estimated APR | 40% to 150% and up |
Holdback Percentage | 10% to 30% |
Loan Amount | $5,000 to $1 million |
Repayment Term | 3 to 24 months |
Funding Speed | 1 to 5 days |
Typical Qualification Requirements | |
Time in Business | 6 to 12 months |
Annual Revenue or Credit Card Sales | $30,000 to $150,000 |
When to Avoid Merchant Cash Advances
MCAs should typically be avoided if you can qualify for any other type of financing. You can see from the example above that MCAs can be quite expensive. If you can qualify for another type of loan, you are almost guaranteed to be able to save money.
In the next section, we’ll go over MCA alternatives to consider. Many of these can be funded as quickly as MCAs and are available to startups, businesses with bad credit, and companies with low revenue.
Merchant Cash Advance Alternatives to Consider
Below is a list of financing alternatives that should be significantly less costly than MCAs.
- Term loans: Is lump-sum funding; good for businesses without a recurring need for funding
- Small business credit lines: Provides continuous access to funding on an as-needed basis
- Small business credit cards: Is good for small to medium recurring expenses
- Equipment financing: Is best for purchasing or leasing business equipment
- Home equity loans (HELs) or lines of credit (HELOCs): Is good for business owners willing and able to access equity from their personal home residence
- Invoice factoring: Provides an advance on invoices you’ve issued to customers
Term loans often have rates between 6% and 15%. With a term loan, you’ll be issued a single lump sum of funds. Lenders issue different types of term loans depending on your intended use of the funds. Working capital loans are a common type of term loan offered by lenders, allowing you to use funds for a number of business expenses, including daily operational costs, payroll, and rent.
A small business line of credit allows you to draw funds on an as-needed basis and typically carries a rate between 10% and 15%. It’s a revolving credit line, which means that as you pay down your balance, you can draw additional funds up to your credit limit. Due to the flexibility of being able to draw funds at your discretion, it’s a good option for covering unexpected expenses or temporary shortages in cash flow.
Credit card interest rates typically range from 20% to 35%. Although similar to a small business line of credit, a credit card allows you to make purchases directly with the card. Credit cards are best for small and medium-sized expenses, as credit limits generally range from $25,000 to $50,000. Some lenders may also offer a rewards program that can reduce the effective costs of your business expenses.
Equipment financing can be used if you need to purchase or refinance business-related equipment. Interest rates are typically low, between 6% and 9%. This is largely because this type of financing is less risky to lenders since it is secured by the business equipment and can be taken by the lender in the event of a default.
With equipment financing, you can choose between a loan or a lease. With a loan, you become the owner and can retain possession of the equipment once the loan is paid off. With a lease, you’ll only be renting the equipment. Once the lease expires, you’ll typically need to give the equipment back to the vendor.
If you have good credit and at least 20% equity in your personal residence, you could be a good candidate for a HEL or HELOC. Both of these are loans that are secured by your property, so you could lose your home if you’re unable to make timely payments. Interest rates for HEL and HELOC are currently averaging 8% and below.
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With invoice factoring, you can get an advance on unpaid invoices you’ve issued to your customers. Eligible invoices typically require your customer to be another business or government entity. You can often get an advance of at least 80% on the amount of the outstanding invoice amount. With invoice factoring, your clients pay the amounts owed to the factoring company, after which you’ll be issued the remainder of the balance minus any fees.
Who Should Consider an MCA
Although an MCA is very expensive, there are some circumstances in which it might be the best option for you. Here are some scenarios that may suggest an MCA is something you should consider:
You are unable to get approved for other financing options.
You might not meet a lender’s qualification requirements if you have bad credit, low revenue, or insufficient time in business as a startup. If this is the case and you have been unable to get a loan approval elsewhere, an MCA might be your only option for funding.
Your business has unpredictable revenue.
With an MCA, your monthly payments can fluctuate based on your credit card sales. Since this means your payments can go down if you experience a slower month, it can be more beneficial as opposed to being tied to the same minimum monthly payment amount on a traditional loan. For the differences between an MCA and a traditional loan, head over to our merchant cash advance vs business loan comparison.
Before you go with an MCA, be sure to check out our list of the best business loans for bad credit. You can also consider some of the options mentioned in our guide on startup business loans.
How to Get an MCA
If you decide that an MCA is a good fit, you can get funding by following these four steps. You’ll need to submit an application to your selected lender, provide any documentation requested by the lender, and then set up credit card processing to receive funding.
Step 1: Choose a Lender & Submit an Application
Most providers allow you to submit an online application, which can normally be done in less than 10 minutes. MCA providers can include banks, credit unions, online lenders, and loan brokers. When choosing a lender, you should consider not only the costs associated with the loan but also customer reviews, hours of operation, and branch locations.
If you’re unsure where to start looking for an MCA, you can check out our recommendations for the best merchant cash advance companies.
Step 2: Provide Required Documentation
Depending on the lender you choose, you may be asked to provide documents as part of the application process. If not, you’ll be asked for these items after you apply. While an exact list of required items will vary depending on the lender and your business qualifications, required documents may include the following:
- Two months of credit card processing data
- Two months of business bank statements
- Personal and business tax returns
- Profit and loss statements
Step 3: Set Up Credit Card Processing
Once you have been formally approved for an MCA, the next step will be to set it up with your credit card processor. If you don’t already have one or are considering switching credit card processors, check out our recommendations for the best online payment and credit card processors.
Step 4: Verify Receipt of MCA Funds
Following the successful competition of the credit card processing setup, you’ll be issued the funds for your MCA. Verify that you received the agreed-upon amount and that the repayment amounts being taken from your daily credit card receipts are consistent with the terms of the financing agreement.
If you discover that you’ve made a mistake after getting an MCA, you could still save some money by paying it off early. See our guide on how to refinance a merchant cash advance for instructions.
Frequently Asked Questions (FAQs)
Funding for many MCAs can be issued in as little as 24 to 72 hours. The length of time needed for you to receive funds can vary slightly depending on the details of your funding request and the complexity of your company’s finances.
Due to the high costs, MCAs should be considered a last resort. We recommend considering other types of loans, such as working capital loans, equipment financing, and credit lines. Many providers of those loans can issue funding as quickly as MCAs and carry flexible qualification requirements.
You can likely find a less costly loan elsewhere. Consider our list of the best merchant cash advance alternatives. Many loan programs and lenders offer loans to businesses with little time in business, bad credit, and low revenue. Although you may not qualify for the best-advertised rates, you should still find a more affordable option than an MCA.
Bottom Line
A merchant cash advance can provide quick funding to businesses with a large volume of credit card sales. However, it’s also one of the most expensive forms of financing available and should only be considered as a last resort. We recommend shopping with multiple lenders as you’re very likely to find more affordable loan options even if your business is new, has bad credit, or generates a small amount of revenue.
