A merchant cash advance (MCA) is a financing product wherein businesses receive funds upfront in exchange for a fixed percentage of their daily credit card receipts. MCA providers charge a cost of capital of 1.1x to 1.5x the amount advanced (35% to 150% APR), and lenders take payments directly from credit card sales.
What Is a Merchant Cash Advance?
A merchant cash advance (MCA) is a cash advance given in return for a percentage of a business’ daily credit card receipts until the loan is repaid. MCA providers charge a cost of capital between 1.1x and 1.5x of the amount advanced. This results in a cost of capital that’s much higher than other small business loans.
Benefits & Drawbacks of a Merchant Cash Advance
Low minimum qualifications
No control over payment size
Payments based on revenue
Requires daily payments
MCAs have a high cost of capital, and borrowers use them as a last resort for working capital needs. Before deciding to work with a merchant cash advance provider, business owners may want to consider MCA alternatives. MCAs have flexible revenue-based repayment schedules that appeal to small businesses with large swings in sales.
How Merchant Cash Advances Work
Business owners sell part of their future daily credit card receivables to a lender for an advance. The lender then collects a holdback percentage, or a portion of daily credit card receivables, as payment for the merchant cash advance. The total cost of the advance is the loan amount times a factor rate offered by a merchant cash advance provider.
Lenders base the amount they’re willing to advance on the size of daily credit card receivables. They then adjust the holdback percentage to ensure business owners repay the advance in a timely manner. Most merchant cash advances have maximum terms of 18 months, but typically last between six and nine months.
Business owners can calculate MCA costs by multiplying the factor rate by the size of the advance. For a factor rate of 1.25x and an advance of $10,000, business owners must repay $12,500 to settle the account. The daily payments will keep coming out as long as the advance is outstanding, and business owners who face slow periods may be on the hook for making up the difference.
Merchant Cash Advance vs Business Loan
A business loan and an MCA both offer the business owner a lump sum of capital in exchange for ongoing interest charges. Business loans rely on company revenue, while an MCA relies on credit card receivables for funding. Costs are higher for an MCA because it deducts daily payments as a percentage of receivables.
Who Merchant Cash Advances Are Right For
Merchant cash advances are often beneficial for businesses with seasonal or cyclical revenues that could not find another short-term financing option. Businesses in need of faster funding than they could get through a working capital loan may also find MCAs to be an appealing financing option.
Scenarios in which a merchant cash advance is the best option include:
- Business owners unable to qualify for other financing: Most financing options available to small business owners offer many of the same benefits at a lower cost. Business owners should always exhaust other options before getting a merchant cash advance.
- Businesses with unpredictable revenue: New businesses that have high fluctuations in revenue can benefit from the variable repayment structure of an MCA. Business owners should calculate the holdback percentage and any taxes and tips their customers pay on credit cards to estimate affordability.
- Business owners with bad personal credit: A merchant cash advance is often an option for business owners with a personal credit score of 500 or lower. However, there are other bad credit business loans worth trying before committing to a high interest rate.
When to Avoid Getting a Merchant Cash Advance
Since MCAs are an expensive form of small business financing, businesses able to qualify for another financing option should consider that first. Most alternatives to MCAs will offer borrowers a lower overall cost of capital and have more predictable repayment terms.
Remember that there are fewer federal regulation around MCAs, and borrowers might encounter some predatory lending practices. It’s important to check the reputability of an MCA provider. MCAs can still be helpful for companies needing to fund short-term financing needs or need an influx for working capital—if they use a reputable provider.
Still, many businesses fall into a never-ending cycle of MCAs. A company might use an MCA to pay off existing debt, only to find that the MCA repayment is more expensive, so they must refinance the MCA to get out of it. When applying for an MCA, it’s important to ensure that the business will make full repayment.
Merchant Cash Advance Costs, Terms & Qualifications
Merchant cash advances (MCAs) range from $5,000 to $500,000 and have factor rates between 1.1x and 1.5x. Lenders base repayment on a holdback percentage that varies by lender and can range from 8% to 30%. There are minimal eligibility qualifications for MCAs, making them easier to get than most short-term financing solutions.
MCAs are an expensive short-term financing option. The costs associated with MCAs largely depend on the following factors: the amount of the advance that the business needs, the factor rate charged by the provider on the amount advanced, and the daily holdback percentage of credit card receipts.
Merchant cash advance costs include:
- Factor rate (1.1x to 1.5x on average): The factor rate is the amount that the MCA provider charges for use of the funds (instead of an interest rate). The typical factor rate for an MCA is 1.1x to 1.5x the amount advanced.
- Amount advanced relative to the factor rate: Because the factor rate is a multiplicative cost, borrowers can only determine the actual cost of the capital once they know the full amount they will advance.
- Holdback percentage (8% to 30%): The holdback percentage is the amount that the MCA provider collects daily from credit card receipts as payment on the advance. The average holdback percentage for an MCA is between 8% and 30%.
- Expected APR (35% to 150%): Because of the short repayment terms and the high cost of capital, the expected APR for MCAs range from 35% to 150%.
Merchant Cash Advance Terms
An MCA is a quick financing option for businesses in need of working capital. Lenders issue an approval decision within 24 hours of application submission, and borrowers can expect funding within two to five days. However, the repayment term for an MCA is variable and ranges from three to 24 months.
Merchant cash advance terms include:
- Advance amount ($5,000 to $500,000): The maximum size of the advance, which lenders determine using daily credit card receivables.
- Repayment term (three to 24 months): The repayment terms are a guideline. Business owners who are not making deposits quickly enough are liable to make up the difference every month.
- Repayment schedule (daily): There are some exceptions, but most MCA providers require daily payments since they deduct part of daily credit card settlements.
- Collateral: Lenders require a blanket UCC filing on all business assets. This gives lenders the option to pursue business assets if the borrower defaults on the advance.
- Personal guarantee: MCA providers require a personal guarantee, which secures the loan with personal assets. Business owners getting a merchant cash advance should understand that if they cannot repay it, lenders may pursue personal assets.
- Funding speed (one to five days): Lenders analyze credit card receivables and most offer a quick online application. The total time from applying to receiving an advance is one to three days. But, sometimes, lenders take a little longer to verify the information.
The time for repayment is variable because an MCA bases payments on a percentage of a business’ daily credit card receipts. This means that the daily repayment amount depends on a business’ credit card cash flow. The total amount that’s repaid is always the same regardless of time frame; however, the faster a business pays back its MCA, the higher its APR.
Merchant Cash Advance Qualifications
The qualifications for MCAs are minimal compared to conventional business loans and alternative business loans. While requirements vary by provider, typical qualifications for MCAs are $3,000 in monthly credit sales, a history of accepting credit card payments with a credit card processor account, and a credit score of at least 500.
Merchant cash advance qualifications include:
- Monthly credit card sales (at least $3,000): Most lenders require a minimum amount of credit card sales for a business to qualify. This ensures that the business has adequate revenue to repay the loan.
- Time in business (at least three months): Although the absolute minimum time in business required is three months, most lenders require at least a year in business. This provides them with access to more information about revenue cycles.
- Personal credit score (at least 500): One of the biggest benefits of a merchant cash advance is the low minimum credit score requirement. This gives business owners with poor personal credit an opportunity to qualify for financing.
- Qualifying credit card processor: Lenders and credit card processing companies have agreements and may not work together. It’s best to work with a lender to determine if the credit card processor a business is using will work.
The minimum qualifications to receive an MCA are low. However, business owners should not expect to qualify because they meet all the minimums. Borrowers with low credit scores may need to have a higher time in business and businesses with low revenue may need to have higher credit scores. Most merchant cash advance providers don’t charge an application fee, and this can be the best way to determine qualifications.
Merchant Cash Advance Cost Example
Business owners can use a merchant cash advance calculator to estimate the cost of an advance. In this example, a business owner qualifies to borrow $100,000 at a factor rate of 1.2x with a 20% holdback percentage. The business has $200,000 in monthly credit card receivables, so the advance will take six months to repay and results in an APR of 75.97%.
Factors that increase the APR of the loan include:
- Borrowing more money
- Higher factor rates
- Higher holdback percentages
- Increases in revenue
Business owners should borrow only the capital that they need right away. Businesses should also shop around with multiple lenders to ensure that the rate and holdback percentage they receive is the best offer. Revenue increases cause the business to repay the loan more quickly. While this may seem beneficial, it raises the APR and total cost of the funding, which makes a merchant cash advance a poor choice to finance growth.
Merchant Cash Advance Providers
There are countless merchant cash advance providers, and there are certain factors that applicants should consider before they choose one. Business owners will want to know the maximum advance amount, the factor rate that they will charge, the holdback percentage, and if they charge additional fees.
Top merchant cash advance providers include:
1. National Funding
National Funding offers a merchant cash advance up to $250,000 with a factor rate from 1.1x to 1.16x and no additional fees. Business owners with at least one year of operations, $3,000 in monthly revenue, and any personal credit score can qualify for funding. The online application takes 10 minutes to complete and funding is available as soon as the next day.
2. CAN Capital
CAN Capital offers MCAs of up to $250,000 with factor rates ranging from 1.15x to 1.35x. CAN Capital also charges a fixed administrative fee of $395 for each loan. Businesses with monthly credit card sales of at least $4,500 per month and six months of business operations can qualify for an MCA and receive funding in two days.
If a business needs quick financing for working capital needs, Credibly can approve and issue a cash advance within 48 hours. Advance amounts range from $5,000 to $400,000, with factor rates ranging from 1.15x to 1.41x. Credibly charges a 2.5% origination fee, and their average holdback percentage is 10% to 25%.
4. Fora Financial
Fora Financial charges a factor rate between 1.15x and 1.33x of the amount advanced. Unlike National Funding, which doesn’t charge any fees, and similar to Credibly, which charges 2.5%, Fora Financial charges a loan origination fee equal to 4% of the advance amount. Funding takes 72 hours or longer to receive.
Merchant Cash Advance Application Process
The merchant cash advance (MCA) application is as short as one to two pages, is straightforward, and applicants can complete it online. After submitting an application, lenders request information regarding credit card sales and business finances. Approval is fast, and borrowers can receive funding within two to five days.
The six steps involved in getting an MCA are:
1. Fill Out an Online Application
The application process comprises completing a one- to two-page application form found on an MCA provider’s website. This application is used to assess the high-level suitability of a company. Once a business owner fills out the application and the MCA provider reviews it, the lender will request additional information.
An MCA application includes:
- Social Security number
- Business tax ID
- General information about the business
2. Provide Additional Documentation
If the online application looks good, the MCA provider will contact the borrower to provide additional documentation regarding credit card processing statements, evidence of accepting credit cards for at least two years, and business account bank statements. This occurs within 24 hours of a business owner submitting the online application.
Additional documentation for an MCA application includes:
- At least two months of credit card processing data
- At least two months of business bank statements
- Evidence of at least two years of accepting credit cards
This additional documentation is used to ensure that a company has at least $50,000 in annual credit card receipts and the cash flow needed to repay an MCA. As long as a business meets the minimum annual credit card receipt requirements, has adequate cash flow, and has two years of history accepting credit cards, an MCA provider will most likely approve the MCA.
3. Get Approved for an MCA
Based on the information provided during the application process, the provider will approve an MCA for the business within 24 hours. Once the lender approves an advance, it will provide the borrower with the amount of advance they qualify for, the factor rate, and the required holdback percentage.
The approval is nonbinding and gives a business owner the information needed to decide whether to accept or deny the MCA. For example, if the maximum lump sum amount is too low, the factor rate too high, or the holdback percentage too high, a business owner might decline the MCA. If, however, the opposite is true, or if the financing needs are great enough, a business owner will accept the terms given to them by the MCA provider.
4. Set Up Credit Card Processing
If a business isn’t already using a credit card processor their MCA provider approves, the borrower must switch credit card processors. This is because MCA providers work with specific processing companies to collect the daily holdback amount required to repay the MCA. It might be inconvenient and time-consuming to switch, but it is a requirement when accepting the advance. The time to switch adds as much as a week onto the timeline to funding.
5. Receive the Lump Sum Cash Advance
Once the business sets up the proper credit card processor, it’s ready to receive the cash advance and begin paying the MCA provider daily. Lenders deposit the funding into the business’ bank account and start taking payment from daily credit card receipts, similar to a processing fee.
The credit card processing company facilitates the repayment. It does this by taking a percentage of the business’ daily receipts and depositing those funds into the account of the MCA provider.
6. Make Daily Payments From the Merchant Account
As soon as the business receives the cash, it can start making payments based on a percentage of the company’s daily credit card receipts, known as the holdback percentage. Lenders take payment from the company’s merchant credit card account, and businesses should be ready to make payments as soon as they receive the cash advance.
As long as there is money in the merchant account, an MCA provider will receive daily payments from the credit card processor. The total time to repay the advance is variable and based on a company’s average daily credit card receipts. However, the typical length of repayment is between 12 and 14 months.
Pros & Cons of Merchant Cash Advances
There are advantages to a merchant cash advance (MCA). Business owners can receive MCA funding quickly, they are easy to qualify for, and simple to apply for. However, the overall cost of an MCA is much higher than other short-term financing options. The high cost of capital, coupled with irregular daily payment amounts, can make an MCA a short-term solution to a long-term need.
Pros of an MCA
- Quick funding: MCAs are one of the fastest ways for a small business to receive financing, often within 48 hours of applying.
- Simple application: Business owners can complete an MCA application online, with limited supporting documentation.
- Easy qualifications: Compared to other financing options for small businesses, MCAs have basic minimum qualifications, making them much easier for businesses to be eligible for this funding.
Cons of an MCA
- High costs: Because of the factor rate on MCAs, this financing can often have APRs in the triple digits, depending on how quickly a business repays the advance. This makes it one of the most expensive funding options for small businesses.
- Uneven payments: Lenders base payments on a certain percentage of daily credit card sales. The total payment towards the advance can vary from day to day and month to month, making budgeting difficult.
- Short-term solution: While borrowers can receive funds quickly to cover immediate working capital needs, the high daily percentage withdrawals from credit card receipts and high repayment costs can become an overwhelming burden to the business.
Merchant Cash Advance Frequently Asked Questions (FAQs)
How do MCAs work?
An MCA provides small businesses with a lump sum payment upfront in exchange for a fixed percentage of future credit card sales. As payment, the MCA provider receives a percentage of the business’ daily credit card receipts until they repay the advance and any additional fees in full.
What is an MCA loan?
An MCA is not a loan in conventional terms. It is an advance on future credit card sales. The MCA provider advances funds and then collects a percentage of the daily credit card receipts until the business repays the advance and associated fees in full.
How much does an MCA cost?
MCAs are an expensive short-term financing option. The MCA provider charges a factor rate (typically 1.1x to 1.5x), which lenders multiply by the amount advanced to determine the repayment amount. A business that borrows $10,000 at a factor rate of 1.4x will repay $14,000 (plus any origination fees).
An MCA is a cash advance given to a company in return for a percentage of its daily credit card receipts. Lenders collect daily payments from the company’s merchant account based on a holdback percentage until the business repays the advance in full.