A merchant cash advance (MCA), or business cash advance, is a lump sum payment in exchange for a fixed percentage of your business’s daily credit card receipts. They are short term financing products that can have APRs as high as 200%+, variable terms, and daily repayments. Business owners therefore typically look for alternatives like term loans or lines of credit.
Fundbox, who sponsored this article, is a great MCA alternative because of their transparency and flexibility in their financing. They offer line of credit financing up to $100k and don’t require a personal credit check to get started. They offer competitive interest rates and there is no prepayment penalty, letting you save money by repaying early.
4 Reasons to Consider a Merchant Cash Advance Alternative
Most see a merchant cash advance as quick financing to fund working capital needs like purchasing equipment or preparing for busy seasons. However, an MCA can be expensive, hard to understand, and based on credit card revenue. Further, some borrowers ladder them when there are better long term options. For these reasons, business borrowers should consider other alternatives.
According to Greg Powell, Head of Product Marketing at Fundbox:
“A merchant cash advance can be appealing to small business owners with poor credit or who process a lot of face-to-face transactions, but they’re very expensive. An MCA can have huge rates and you don’t have control over how much of your receipts are deducted as part of the fees you owe each week. This can be a huge percentage of your daily or weekly sales, which could cripple your business and prevent you from growing – the reason why most businesses want access to financing to begin with.”
“A merchant cash advance can be appealing to small business owners with poor credit or who process a lot of face-to-face transactions, but they’re very expensive. An MCA can have huge rates and you don’t have control over how much of your receipts are deducted as part of the fees you owe each week. This can be a huge percentage of your daily or weekly sales, which could cripple your business and prevent you from growing – the reason why most businesses want access to financing to begin with.”The top 4 reasons you should consider a merchant cash advance alternative are:
1. A Merchant Cash Advance is Expensive
A merchant cash advance is one of the most expensive forms of working capital financing. For reference, the average annual percentage rate (APR) of a business cash advance is between 80 – 120%. This is because while the daily repayments and total cost of capital are fixed, repayment timelines are variable. The longer it takes you to repay, the higher your APR.
Many borrowers agree to the cost due to poor personal credit or because of an MCA’s funding speed. However, due to the high cost, some business owners are unable to keep up with payments. This leads to many defaults and credit issues for the borrower.
For example, the default rate for an MCA is as high as 15% while traditional loans like SBA loans only have default rate around 2%. While it could be argued that an MCA attracts borrowers that are more likely to default on a loan, it’s also clear that an MCA is a very risky lending option due to its cost.
And defaulting on an MCA isn’t the only concern for small business owners. As Greg Powell of Fundbox notes, “Even those small businesses that don’t default on their MCA can face significant issues due to their high costs. For example, businesses can find that while they are able to keep current on payments, the MCA is siphoning off too much of their revenue, leaving the business owner with no funds to re-invest and grow their business.”
By contrast, there are many MCA alternatives that offer APR rates from 10 – 50%, all of them with a much lower total cost than an MCA. What’s more, repayments are typically weekly or monthly, which puts less of a financial strain on a borrower than the daily repayments required by an MCA.
2. Merchant Cash Advances Can Be Difficult to Understand
Merchant cash advances (MCAs) can be difficult to plan for because much of the costs and terms are variable. For example, your true APR, your daily repayment amounts, and your overall timeline for repayment are not transparent. This makes it hard to budget and plan for the future.
With a business cash advance, for example, your daily repayments are based on an MCA’s factor rate, which is the multiple you’ll repay your provider over the life of your advance. The average factor rate for an MCA is between 1.1 – 1.4. For example, if your factor rate is 1.3 and you borrow $10k, you would have to repay a total of $13k to the MCA provider.
After you receive your lump sum advance you’ll pay the provider back every day through a holdback percentage of your daily credit card receipts between 8 – 30%. If your holdback percentage is 15% and you make $1,000 in one day in credit card sales, you’ll have to repay $150. If your credit card sales the next day increases to 20%, you would have to repay $200 that day. Repayments are automatically taken out of your receipts.
A business cash advance alternative, by contrast, is more transparent with its cost and terms. You can receive the same lump sum payment as a merchant cash advance and also know your exact repayment terms, including the APR, total cost of capital, repayment amount, repayment timeline. This helps you better budget and plan for the future of your business.
3. Merchant Cash Advance Funding is Typically Based on Credit Card Receipts
A traditional merchant cash advance (MCA) might be a great way to access a large lump sum payment for working capital needs, but businesses who don’t do a lot of credit card sales may not qualify. MCAs are therefore a very limited form of financing that is typically most beneficial to businesses who do a majority of their sales via credit cards.
This can cause multiple issues. First, if you don’t have monthly credit card sales around $10k per month you may not even qualify for a traditional MCA. However, even if you do have enough credit card sales to qualify, the historical amount of your sales will dictate the size of the lump sum payment you qualify for. This might limit your ability to borrow and limit the effectiveness of an MCA.
In addition to traditional merchant cash advances, some lenders will also provide ACH Cash Advance (aka a Bank MCA or Bank Only MCA). These lenders will take into account more than just your credit card sales, which opens the option up to more borrowers, but does nothing to alleviate the expensive, complicated nature of MCAs.
Luckily, business cash advance alternatives are typically more flexible during the application process and qualify you based on either your personal credit and/or your business history. If you have a strong overall business or have a high personal credit score, it’s usually easier to qualify for larger amounts of financing with alternative options.
4. You Really Need Long Term Capital
Many businesses get a merchant cash advance thinking they need short term capital, but they end up needing financing for longer than they expect. Further, some business owners find that an MCA is too expensive and are forced to take out more MCAs to cover or refinance with another loan provider. The result is that you’ll be on the hook to repay more capital than you originally planned to borrow.
By contrast, merchant cash advance alternatives can offer longer repayment terms from the start if you need a longer term option. If you don’t know how much you need or when you’ll be able to repay, a short term line of credit, for example, might be the alternative for you since it’s revolving.
Merchant Cash Advance Alternatives for Small Businesses
There are plenty affordable MCA alternatives that are more transparent and probably more suited for your needs. These alternatives include short term loans, lines of credit, and long term loans. What’s more, many of them can fund within 1-3 days. Ultimately, the right financing option for you will depend on your needs and your borrower qualifications.
Common Merchant Cash Advance Alternatives
| MCA Alternatives | |
|---|---|
| Short Term Loan | Businesses that need up to $500k in financing to fund a large business like purchasing equipment. Repayment terms are up to 3 years. |
| Short Term Line of Credit | Businesses that need up to $100k in a revolving credit line they can use over and over again for unexpected or recurring expenses. Repayment terms are 6-12 months. |
| Long Term Loan | Businesses that need a large amount of capital to grow the business or make large purchases up to $5 million. This is the most affordable solution and will have the longest repayment terms, up to 10 years. |
1. Short Term Loan
A short term loan is a lump sum payment typically borrowed as an alternative to traditional bank loans because of the fast funding speed. These loans are typically provided by online lenders that will look at the combination of your personal credit history and business performance to approve you for a loan up to $500k.
A short term loan is a good alternative to an MCA because it’s a more affordable lump sum financing arrangement with fixed repayment terms and greater transparency. You can borrow up to the amount you qualify for and typically have weekly or monthly amortized payments over the life of the loan. You’ll know exactly how much you’ll pay during each month of repayment, and you won’t have to make daily payments like an MCA.
Who A Short Term Loan is Best For
A short term loan is best for businesses with one-time working capital needs like equipment purchases. If you need more money later you’ll have to re-apply and go through the underwriting process again. Short term loans are better than MCAs and are great for owners who need financing up to $500k and who don’t receive most of their revenue through credit card receipts.
Short Term Loan Terms
The terms of your short term loans will vary by lender, but typically you can expect something similar to these terms and ranges:
- Loan Amounts: $5k – $500k
- Funding Speed: 1 – 3 Days
- Repayment Terms: 3 Months – 3 Years
- Payment Schedule: Weekly or Monthly
Minimum Qualification Requirements
You’ll typically qualify for a short term business loan if you meet these minimum standards:
- Credit Score: 500 – 550+ (check your credit score for free)
- Time in Business: At least 1 year
- Annual Business Revenue: $100k+
Short Term Loan Costs
Short term business loans will typically be fully amortized, but the total cost will vary by lender depending on the fees and interest rates your lender charges. The common cost that you’ll see with these loans is your annual percentage rate (APR), which typically will fall within this range:
- APR: 30 – 50%
What a Short Term Loan is Missing
A short term loan is great if you need a large amount of capital for a one time need, but if you need more money in the future you’ll have to reapply. It can be frustrating going through the application process over and over again and you might benefit more from a business line of credit if this is the case.
Where to Get a Short Term Loans
You can get a short term loan through online lenders like Fundbox. They offer up to $100k in financing without requiring a personal credit check to get started.
Greg Powell, Head of Product Marketing at Fundbox, says:
Their application process typically takes place entirely online in about 10 minutes. You’ll get a quick approval if you qualify and then can be funded within 1 – 3 days.
2. Short Term Line of Credit
A short term line of credit (LOC) operates a lot like a credit card. You’ll get approved for a maximum borrowing amount and then be able to draw against that amount over and over again until you reach it. You’ll only pay interest on the amount borrowed. After you repay you can reuse your credit line because it’s revolving.
These short term line of credit products are typically found via online lenders who can fund quickly. These LOC products are better than MCAs because they’re revolving so you can use them over and over again as you repay what you borrow. They’re also more affordable and don’t require you to have a lot of credit card receivables.
Who a Short Term Line of Credit is Best For
A short term line of credit is best for businesses with recurring cash flow problems that may need to borrow money more than once. It’s also a good fit for businesses who want to prepare for unexpected expenses because you don’t have to use the funds until you need them and won’t have to pay interest on the part of the line you’re not currently borrowing.
Additionally, a small business line of credit can be a good fit for those companies that want to steadily invest in their growth over time. For example, businesses that want to fund marketing campaigns, buy materials in advance of their next big project, or expand their line of inventory may find a short term line of credit a very useful tool.
Short Term Line of Credit Terms
The terms of your LOC are going to vary by lender, but typically you can expect something similar to these terms:
- Loan Amounts: $2k – $300k
- Funding Speed: 1 – 3 Days
- Repayment Terms: 6 – 12 Months
- Payment Schedule: Weekly or Monthly
Minimum Qualification Requirements
You’ll be in a good position to qualify for a short term line of credit if you meet these minimum standards:
- Credit Score: 500 – 600+ (check your credit score for free)
- Time in Business: At least 1 year
- Annual Business Revenue: $50k – $100k+
Short Term Line of Credit Costs
Your costs for a short term line of credit are going to vary based on a number of things, such as the fees your provider charges and whether or not your financing is fully amortized. Some providers require you to pay the same amount of interest and fees, regardless of when you pay off the loan, while others will allow you to save money by paying off what you owe early.
The common cost that you’ll see with these line of credit products is your annual percentage rate (APR), which typically will fall within this range:
- APR: 15 – 40%
What’s Missing With a Short Term Line of Credit
A short term line of credit is great for recurring working capital needs, but the total amount of capital you’re approved for is typically less than a short or long term loan. If you need more than $100k then this might not be the right fit for you.
Where to Get a Short Term Line of Credit
There are several online lenders where you can get a business line of credit. Fundbox is one of our recommended small business line of credit providers. They offer up to $100k of financing, don’t require personal credit to get started, and only request a minimum of 3 months of business transactions minimum. Plus, they can fund in as soon as 1 day.
Long Term Loan
A long term loan is a lump sum payment just like a short term loan, but with a longer repayment term of up to 10 years. These loans are typically originated by a traditional bank and are more difficult to qualify for than the other financing options on this list. It also takes much longer to go through the application process, taking 30 – 90 days to get funded.
A long term loan is much more affordable than an MCA, with interest rates less than 10% and repayment terms of 5-10 years. This is a better option if you need long term capital, are looking to make a large business purchase, or if you are trying to consolidate or refinance existing debt.
Who Long Term Loans Are Right For
Long term loans are best for businesses looking to refinance or consolidate expensive business debt. For example, many merchant cash advance borrowers end up using long term loans to spread out the debt they incurred from the MCA because they can’t afford the payments. These loans are also the best option if you’re looking to make very large purchases like commercial real estate.
Loan Terms
The amount you borrower and how you’ll repay your long term loan will vary by lender, but typically you can expect something similar to these terms and ranges:
- Loan Amounts: $20k – $10 million
- Repayment Terms: 5 – 10 Years
- Payment Schedule: Monthly
Minimum Qualification Requirements
You’ll typically qualify for a long term business loan if you meet these minimum standards:
- Credit Score: Prime borrower with 680+ score (check your credit score for free)
- Time in Business: At least 1 year
- Annual Business Revenue: $100k+
Long Term Loan Costs
Long term loans are the most affordable financing alternative to a merchant cash advance. These loans will likely have an interest rate for the duration of loan combined with some origination fees. The total cost will generally fall within this range:
- APR: 6 – 10%
What a Long Term Business Loan is Missing
While a long term loan is the most affordable option, it can take awhile to get funded. Most long term loans take 30 – 90 days to fund which defeats the main purpose of getting an MCA: speed. These loans also take up a lot of your time during the application process chasing down paperwork and answering questions from the loan provider.
Where to Get a Long Term Loan
You can get a long term loan from a traditional lender like a bank. You’ll likely need to talk in and meet with a potential lender face to face with all of your documentation in hand before they’ll start processing your loan application.
Financing From Your Payment Processor
Another alternative to a business cash advance is to get financing through your payment processor. If you’re considering an MCA, then you likely process a lot of credit card payments. This could qualify you for financing from companies like Square or PayPal, who might already process these transactions for you.
These loans are generally offered to you without you even having to apply, and you can accept them quickly online from within your processor’s dashboard. These loans are for smaller financing needs under $100k and they fund within 1 – 3 days. You can learn more by reading our review of Square Capital and PayPal Working Capital.
Bottom Line
A merchant cash advance is an expensive financing option typically used because of their low qualification requirements or fast funding speed. However, there are many alternatives to a merchant cash advances that you can qualify for that will fund faster than many MCA providers and at a lower cost. An MCA should therefore only be used as a last resort.
Fundbox is the best alternative to a merchant cash advance. They qualify you based on your business history instead of your personal credit score. You can borrow up to $100k by filling out an online application that takes less than 10 minutes, and Fundbox can typically get you funded in as quick as 1 day.
Submit Your Comment
Disclaimer: Reviews on FitSmallBusiness.com are the product of independent research by our writers, researchers, and editorial team. User reviews and comments are contributions from independent users not affiliated with FitSmallBusiness.com's editorial team. Banks, issuers, credit card companies, and other product & service providers are not responsible for any content posted on FitSmallBusiness.com. As such, they do not endorse or guarantee any posted comments or reviews.
You must be logged in to comment. Click the "Log in With LinkedIn" button below to connect instantly and comment.