A Guide to Merchant Cash Advances

What are Merchant Cash Advances?

When things are going great, businesses have the cash flow they need for success and growth. During lean times or tight transitions, though, your company may need to find a cash advance loan to keep the doors open or to successfully expand. Though a myriad of funding options exists, merchant cash advances and platform lending are two of the most popular and advantageous options.

The trick is understanding the difference between the two. Each has its own unique characteristics and is more or less appropriate for a specific business need.

Let’s start with definitions:

  • What is a merchant cash advance (MCA)?

A merchant cash advance gives a business up-front cash and takes payments from the credit card receipts on a regular (often daily) basis according to an agreed-upon amount. If you’ve been in business for more than a year, you’ve almost certainly received at least one phone call offering you merchant advance funding.

  • What is a business loan?

A business loan also provides up-front cash but is paid back in monthly installments. These are usually withdrawn directly from your operations account, but terms are flexible if another method works better for your business.

 

Now that we’ve defined MCAs and business loans, here are six differences between the two:

  • Lending structure

Merchant cash advances aren’t technically a loan because of how the payments are structured, meaning they aren’t as regulated or carefully watched. This doesn’t automatically mean that merchant advance funding comes with abusive interest rates and contracts, but it does mean you should read and understand that contract as completely as possible.

  • Approval process

Merchant cash advances approve any business that shows a history of credit card receipts sufficient to pay the money back. This makes them attractive to companies with new or bruised credit histories.

  • Speed of funding

Most MCAs work at the same speed as online lenders – but not always. Ask about this if you go with merchant advance funding and need the money quickly.

  • Payment process

Merchant cash advances take a percentage of credit card sales until the loan is paid. If your company needs flexibility that matches performance, a merchant advance might be the right option.

  • Interest rates

MCA operations don’t typically publish their interest rates. However, factor rates typically range from 1.2 to 1.5 percent (based on risk assessment).

  • Other costs

Merchant cash advances often include set-up fees, processing fees and even payment fees that can as much as double the actual cost of the loan. MCAs, like anything else, have their pros and cons. Here are six positives and three negatives to acquiring a merchant cash advance.

The Advantages of MCAs

  • Get cash fast

One of the biggest positive factors for small or online businesses when considering merchant cash advances is getting the cash quickly. In fact, some cash or capital can be delivered to the business within hours of submitting an online application. This is good news for business owners who simply don’t have the time to wait for long processing that is typical of many banks and larger lenders.

  • Little-to-no paperwork

Everything is done online. So, there’s no lengthy paperwork to fill out, fax, scan or mail. This decreases your wait time and increases your turnaround time.

  • Repayment isn’t a fixed monthly amount

Repayment may be easier over time. This may work in the business’ favor, particularly if sales are slow at first because payments are based on a percentage of sales, rather than a fixed monthly amount.

Pro-tip: The amount of your loan, or advance, will be based in large part on prior credit card sales. Do your homework and come to the table prepared to show current and prior sales so you can know the terms of your loan completely.

  • High approval rates

This is good news for struggling small business owners who may have been turned down for traditional loans by banks and other lenders. High approval rates from companies offering merchant cash advances mean higher chances of securing the capital you need.

  • Perfect credit isn’t required

As the economy takes dips and swings from high to low, the effects are felt largely by the small business owners. These effects can include dwindling markets, low sales and, worst of all, bad credit. Companies that offer MCAs offer a lump sum of money in exchange for future sales, so they can approve these advances with little basis or consideration of poor credit scores.

  • No collateral required

The approval of the transaction is based on the businesses’ past credit card sales. So, if your sales are strong, you stand a good chance of being approved for a cash advance.

While there are many benefits to consider when pursuing a cash advance, there are some things to be aware of as well. As a business owner, the decision is always up to you. Only you know what makes sense for your business and what will propel your business forward. With that in mind, here are three major things to consider regarding a cash advance.

The Disadvantages of MCAs

  • Higher interest rates (in some cases)

Be sure to thoroughly review the terms of repayment so you know exactly how much you’ll be responsible for repaying.

  • Unregulated industry

This segment of the lending industry is not regulated – again, because their repayment terms are tied to future credit card sales. This is why it’s critical to do your homework.

  • Fees

Companies that offer merchant service cash advances can charge a variety of different fees. Ask your provider upfront so you can make the best decision for your business.

How to get a merchant cash advance

Again, you can use a merchant cash advance for a variety of reasons, including:

  • Your business is new and will not qualify for traditional financing.
  • 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.

So, if you decide that an MCA is the right fit for your small business, it’s time to apply. 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 a few hoops to jump through as possible. In many cases, businesses obtain access to their cash within days of applying. Here are three steps to apply for a merchant cash advance:

  • 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.

  • Complete and submit your application.

Compared to traditional funding, a merchant cash advance application is very simple. You’ll 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.

  • 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, so it’s not subject to the strict regulations that commercial bank loans are. Before signing your name, make sure you understand what you’re agreeing to. Traditionally, an MCA 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, a merchant cash 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’s 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.

Want to dig deeper?