Merchant Cash Advance
by Gerri Detweiler
These are not business loans, but, as the name indicates, they are a business cash advance. Many people still call them a MCA loan or Merchant Cash Advance loans. Merchant Cash Advance providers get paid back by taking a portion of your future credit card sales or credit card transactions each day. You can usually get approved in a day or two—with very little paperwork. But you’ll pay for this convenience in very high interest rates. Because this option is so expensive, it should only be used if you’re desperate or want to take advantage of short-term opportunity that requires fast cash. You don’t want to get in the habit of relying on merchant cash advances since its higher cost can make it very difficult to manage future cash flow.
What is a Merchant Cash Advance?
Merchant cash advances provide small businesses an alternative from traditional bank loans. Business owners receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance with a percentage of the business’s sales. MCAs are best for businesses with high credit card sales volume, need funding quickly, or don’t qualify for a traditional business loan.
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Merchant Cash Advance Companies
There are a number of companies offering merchant cash advances, and not all are created equally. Some are more prepared to cater to bad credit, others may offer higher limits. Here’s a breakdown for you to find which might be the best fit for your small business.
Merchant cash advances usually come with an origination fee, not so with National Funding. While small business owners will still face high interest rates typical of merchant advances, National Funding has some one of the lower thresholds for approval for this type of business funding.
It’s difficult for business owners with bad personal credit or thin business credit to get a small business loan, and even more difficult for newer business owners. Can Capital helps bridge that gap, allowing businesses with $4,500 in monthly credit card sales and six months in business to qualify. Be warned, however, their repayment terms are short and higher factor rates result in a higher APR than normal.
Another option for startup businesses, Credibly allows small businesses with six months in operation and $15,000 in monthly revenue to qualify. They can also get you funding in 48 hours, making it an even quicker option than a traditional loan or even other merchant loans or merchant advance loans, as well. They charge a 2.5% origination fee and their factor rates bring in higher APR, as well, but it can be a good option for a high-performance startup.
Another option for startups, Fora only requires six months in business, but has high revenue requirements and an origination fee, unlike National Funding. Despite the high APR and revenue requirements, Fora offers up to $500,000 for a merchant cash advance, much higher than other competitors in the merchant advance game.
American Express Merchant Financing
Not technically a merchant cash advance, American Express Merchant Financing is a short-term loan for businesses that accept American Express credit card payments. If you fall under this category and have held an American Express business credit card for over a year, this could be a much less expensive alternative to a merchant advance. You are more likely to get approved if you have a merchant account with Amex.
Perhaps the best option for applicants with bad credit, Fundbox doesn’t actually offer a merchant cash advance, but their lines of credit are a great alternative for borrowers with bad credit. Merchant cash advances traditionally have lower approval thresholds, and Fundbox’s line of credit falls right in line. Borrowers can qualify with a personal credit score of just 500.
How Does a Merchant Cash Advance Work?
When a small business finds itself in a bit of a financial pinch, where they may need access to short-term working capital there aren’t many options available to them to remedy the situation. This is where a merchant cash advance can come in. A merchant cash advance lender will provide the borrower with the approved amount, and the borrower will repay the advance with a percentage of each day’s credit card sales from your credit card processor. Interest rates on merchant cash advances are notoriously high, and determined by a factor rate, essentially a multiplier of the principal advance. For example, if a business is approved for $100,000 with a factor rate of 1.5, the total amount to repay would be $150,000 ($100,000 x 1.5). The daily payment would then be determined by the terms of the advance.
The factor rate and subsequent APR is determined more by the applicant business’ sales performance. Simply, better revenue numbers can put the applicant in a better situation with a potentially lower factor rate. Merchant cash advances have very low credit requirements, so applicants with bad personal credit or thin business credit profiles can make up for it with solid sales numbers.
What You Need to Know About Merchant Cash Advances
|Fast access to cash||Doesn’t help build business credit|
|Very, very expensive (70% – 200% APR)||You choose how to use|
|Flexible repayment terms||May lock-in merchant processor|
|Minimum daily payment hurts cash flow||No collateral required|
|Strong credit not required||Must accept credit cards|
Merchant Cash Advance Pros
The hallmark benefit of merchant cash advances is the fast access to cash. Many cash advance companies can get you the cash within 48-72 hours. They also don’t require sterling personal or business credit, instead putting more weight on credit card and non-invoice sales numbers. Issuers also place little to no stipulations on how the cash is to be used, meaning you have more freedom to use the advance on what you need without any extra hands steering the ship. You won’t need to put up any collateral, and lenders often offer flexible repayment terms.
Merchant Cash Advance Cons
First and foremost, merchant cash advances are very expensive. If you’re pegged with a high factor rate, you can pay up to 200% APR (annual percentage rate), and even a low factor rate can bring you around 35%. They also won’t help you build business credit, making this an unproductive source of financing for a startup business looking to bulk up their business credit score or profile. With daily required payments and required credit card payments, merchant cash advances can feel more like a pair of handcuffs than a step up.
Merchant Cash Advance Terms and Features
Getting a merchant cash advance is quick and easy, and filing an application can take very little time. With quick approval turnarounds, you can get your cash much quicker than with other means of financing, including short-term loans or long-term loans.
Each merchant cash advance will have a principal amount, a factor rate, a payment period, payment frequency (often daily), and a percentage deduction of your daily credit card sales, including future sales.
Best Uses for Merchant Cash Advances:
- Temporary cash flow help
- Purchasing inventory at deep discount
- Unplanned expenses
- Paying other debts due
- Working capital
How to Qualify for a Merchant Cash Advance
Qualifying may be the easiest part of working with a merchant cash advance. Unlike most business financing options, applicants don’t need to have years in business to qualify. With less emphasis on personal and business credit information, solid sales numbers can help a business with poor credit qualify for a merchant cash advance.
Most lenders offer online applications, making the already quick process even more convenient for business owners.
Proceed with caution! If you don’t qualify for other financing because of less-than-perfect credit, merchant cash advances could help. But you should only be desperate or have a plan for how it will increase revenues more than the cost. This should strictly be a short-term solution. Make sure you calculate the true cost of the advance. The details can be tricky.
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