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Finance & Accounting, Merchant Services, Small Business Loans

What is a Merchant Cash Advance (MCA)?

What is a Merchant Cash Advance

As a business owner, nothing is more rewarding than seeing your company grow and thrive. After all, you are the one putting it all on the line, calling the shots and making important decisions that will lead to your future success. There is a natural ebb and flow to business ownership. At times, you may have an abundance of income; others, you may be low on capital. If you find yourself short of the cash you need to purchase key equipment, make necessary repairs or seize a lucrative opportunity, you may begin exploring funding options to replenish your resources. One option – a merchant cash advance – offers rapid access to cash with minimal qualifications and formalities.

How a Merchant Cash Advance Works

A merchant cash advance (MCA) provides an upfront cash advance on your future credit card transactions. The funding company provides your business with a specific amount of money with the agreement that you will pay it back in full, plus fees and interest. Instead of making payments as you would on a loan, the advance is paid back gradually and automatically as your credit card processor forwards a portion of your daily credit card sales to the merchant cash advance provider. The advance is approved based upon your volume of sales, which determines the amount of money you qualify for.

A merchant cash advance company may not publish fees in terms of an annual percentage rate, but rather as a factor rate. The factor rate is a multiple by which your credit card sales are applied to determine how much money you will repay your merchant cash advance provider each day. Higher factor rates generally equal shorter repayment terms, and lower factor rates result in longer repayment terms.

There are many reasons you might choose to apply for a merchant cash advance:

  • Your business is new and will not qualify for a traditional bank loan.
  • Your credit rating is too low to qualify for traditional funding.
  • You do not have enough assets to provide as collateral.
  • You are only seeking to finance on a short-term basis.
  • You need or prefer flexible repayment terms that allow for lower payments on slow business days.

Steps to Obtaining a Merchant Cash Advance

Applying for a merchant cash advance is a fairly straightforward process that typically includes a streamlined application and simplified paperwork. The idea is to provide borrowers with cash as quickly and with as few hoops to jump through as possible. In many cases, businesses obtain access to their cash within days of applying.

Step 1: Make Arrangements for Collection from a Qualified Credit Card Processor

A merchant cash advance is funded based on your perceived ability to repay the money you borrow. In order to qualify, most funding companies will require that you have an account with a processor who is contracted with your merchant cash advance company. If you currently work with an approved company who already contracted with your funding provider, you can move on to the application process. If not, you may need to establish an account with a credit card processor on your funding company’s approved list.

Step 2: Complete and Submit Your Application

Compared to traditional bank loans, a merchant cash advance application is very simple. You will be asked questions about your company, including the income you generate, your average credit card sales and how long you have been in business. The baseline for qualification varies between different merchant cash advance companies. While you may not be able to fund a startup with a cash advance, you may be able to easily qualify for a merchant cash advance after just a few months in business and a few thousand dollars in average monthly credit card sales.

Step 3: Read and Sign the Contract

This is one of the most important parts in the application process. A merchant cash advance is not a traditional loan, and it is not subject to the strict regulations that commercial bank loans are. Before signing your name, make sure you understand what you are agreeing to. Traditionally, a merchant cash advance specifies that you are:

  • Selling future credit card receipts at a discount in exchange for cash today.
  • Subject to penalties if you default on the terms of your contract.
  • Agreeing to provide a specific amount of your daily credit card sales as repayment to the funding company.

In exchange for a streamlined application and approval process, the advance often comes with a lot of fine print, including complicated terms that even the most credit-savvy business owner might have trouble understanding. It is essential that borrowers carefully read the conditions and stipulations within the contract, including the total cost of the loan’s fees, interest, applicable penalties and other expenses.

Sometimes, it takes a little math to figure out the actual cost of the advance. For example, a funding company may offer $30,000 to a business owner in exchange for $40,000 of future credit card receipts. That represents a 25 percent interest rate over the course of a year, which may be acceptable to a business owner who is in a pinch for cash or believes that the returns on the capital will exceed the costs. However, it is important to note that some lenders require repayment on an accelerated basis. The terms within a merchant cash advance may demand repayment in as little as 6 to 9 months – a timeline that significantly increases the annual percentage rate to as much as 50 percent.

Commercial Loans: An Alternative to Merchant Cash Advances

A merchant cash advance should not be confused with a commercial business loan. Unlike cash advances, traditional bank loans are approved based on your credit history, your time in business and the purposes for which you will use the capital. They boast longer repayment terms and higher loan values. However, they are not known for their simplicity and ease. A person applying for a commercial loan from a traditional bank can expect:

  • In-person meetings
  • Detailed paperwork
  • In-depth documentation
  • Collateral requirements
  • Several weeks before obtaining a decision

Hybrid Financing with Platform Lending

Today, there are other options for obtaining business loan funding, including online lending platforms. Online lending platforms can provide business loans that combine the expediency and simplicity of a merchant cash advance with the basic payment terms and high loan values of an installment loan – all typically at a much lower APR than would be available with a merchant cash advance. The entire application process can be completed online, and funds are typically available in less than 72 hours.

Online lending platform loans do not abide by the traditional rules of lending. Instead, businesses are approved not only based on credit score, but also upon a wide range of other factors. You can connect your application directly to your accounts at multiple online vendors, banks and payment processors to help the online lender analyze your business in real time. Once approved, your business is issued a line of credit that you can draw against on an as-needed basis.

Choosing the Right Funding for Your Company

Choosing a financing solution can be one of the hardest decisions you face as a business owner. We may not be able to tell you which financing option is the right one for your business, but we can help you identify the differences between a bank loan, a loan from an online lending platform and a merchant cash advance. Taking the time to compare your options helps ensure the decision you make does not become a burden in the future.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.