If you’re a small business owner who needs quick access to capital immediately, a Merchant Cash Advance (MCA) could be what you’re looking for. Also referred to as a Business Cash Advance or MCA Loan, this type of cash advance a merchant can take is easily accessible and comes with flexible payment terms. Typical requirements like an excellent credit score or overflowing financial statements aren’t mandatory for merchant cash advance eligibility.
Payment amounts for a merchant cash advance are based on daily credit card sales and aren’t fixed, so business owners only pay what their cash flow can bear each month. And though it’s geared towards short-term initiatives, a merchant cash advance doesn’t become more expensive if sales slow down for a little while. This makes a merchant cash advance ideal for small businesses struggling with the fixed payment schedule of traditional business loans.
A Merchant Cash Advance (MCA) is sometimes referred to as a “Business Cash Advance,” “Credit Card Factoring,” or a “Credit Card Processing Loan.” A business owner will receive a lump sum paid back via a fixed percentage of future daily credit card sales (Holdback Rate). Payments are automatically deducted each day, and the size of each one fluctuates with your debit and credit card sales volume.
A merchant cash advance is not as challenging to qualify for as other small business loan options. Small business owners with little collateral, business credit history, or low Fico credit scores may benefit from this option. The amount of business financing you qualify for from merchant cash advance companies depends on the amount of future credit card receivables or the sales you make to customers using a credit card payment. The funds from a merchant cash advance are directly deposited into the business’s bank account.
With this kind of business financing arrangement, you agree to receive a lump sum payment of capital at a discount in exchange for future credit card sales. This is an “advance” on future credit card sales. The money is distributed almost immediately from the merchant cash advance provider instead of waiting weeks/months to get the total amount from the credit card processing company.
So here’s how a merchant cash advance works as opposed to traditional bank loans. The size of your borrowing amount and your merchant cash advance terms depend primarily on your previous and anticipated monthly credit card sales volume. This is the main criterion for merchant cash advance qualifying in general. As long as you have strong sales from debit and credit cards, poor credit probably won’t prevent you from qualifying.
The funds from a merchant cash advance are directly deposited into the business’s bank account.
However, your business credit profile impacts several other merchant cash advance loan elements. This includes the fixed percentage of daily or weekly sales deducted, called the “holdback rate” or “holdback percentage.” Typical holdback rates run between 8% and 15% of daily sales. So, your holdback amount changes based on business revenue.
Each borrower is assigned a Factor Rate instead of an interest rate as you have with traditional bank loans. This determines the total amount you will repay the merchant cash advance provider. A typical factor rate typically ranges from 1.09 to 1.5.
For example, say you borrow $50,000 with a factor rate of 1.4. This means you’d owe $70,000 in total. MCA providers deduct 10% of your debit and credit card transactions each time you batch out. In the first month, you generate $100,000 in card transactions. Based on your holdback percentage, you’d pay $333 daily to pay back $10,000 monthly. In the second month, your sales drop, and you only have $70,000 of credit card receipts. Since the holdback repayment terms and percentage never change, your daily payment would drop to $233.
Like other short-term business financing products, business cash advances are designed to be paid in full as soon as possible. However, the total cost decreases when your outflows are more spread out due to slow sales.
Merchant cash advances have the highest approval rate of any business funding product, at nearly 90% in 2023. This is up from an approval rate of 84% in 2020. Source: 2023 Report on Employer Firms: Findings from the 2022 Small Business Credit Survey
The market demand for merchant cash advances is expected to grow rapidly, in part due to adoption from restaurants and retailers. The global merchant cash advance market is expected to reach $26.3 billion by 2029. Source: Adroit Merchant Cash Advance Market Report.
Small businesses continue to struggle with cash flow management. It’s estimated that around 82% of small businesses fail due to a lack of cash flow. Source: The National Federation of Independent Businesses
Few small business financing options are easier to qualify for. If you have subpar credit, issues with your payment history, cash flow problems, and less than one year in business, this may be the only way to get the funding you need. And since the requirements are so loose, you can get approved in under 24 hours.
One of the advantages of a merchant cash advance is the quick funding process, with funds directly deposited into the business’s bank account.
The repayment structure is particularly advantageous for highly seasonal businesses or businesses that experience occasional revenue dips or cash flow gaps. Since merchant cash advance repayment is based on future sales, slow months mean smaller payment amounts than paying the same amount each month, regardless of how well your business is doing.
Seasonal businesses could theoretically use the funds during the slow season and pay off a good chunk of the loan during the busy season, even if the two periods are three or four months apart. If you know future sales will drop again after the busy season, you don’t have to worry about making the same payment as before, like you would with a traditional bank loan.
This scenario is ideal for a merchant cash advance because the amount you pay would fluctuate with credit card payments and be more spread out.
For example, let’s say you advance a merchant cash loan of $100,000 with a factor rate of 1.3. This puts your principal at $130,000. If you paid off the entire advance in six months, your APR would be at least 60%. If you repay the advance agreed upon in twelve months, your APR would likely be closer to 30%.
Loose requirements come with a cost. Borrowers with subpar FICO scores and cash flow problems are statistically less likely to pay off the merchant cash advance on time. For this reason, a merchant loan is one of the most expensive small business financing products on the market. Larger payment amounts offset the heightened risk placed upon the merchant cash advance company.
The size and frequency of your payment amounts could also put tremendous pressure on your operating capital. You’d make much higher payment amounts even if your sales remained strong for several months.
Lastly, there’s no benefit to paying off the entire merchant cash advance early. Unlike a more traditional financing option, your repayment amount would be the same regardless of when you pay off the advance. This differs from a business line of credit or term loans with amortization schedules, where paying early allows you to save on your interest rate percentage.
| LOAN TYPES | MAX AMOUNTS | RATES | SPEED |
|---|---|---|---|
| Merchant Cash Advances | $7.5k – $1m | Starting at 1-6% p/mo | 1-2 business days |
| SBA Loan | $50k-$10m | Starting at Prime + 2.75% | 8-12 weeks |
| Business Term Loan | $10k to $5m | Starting at 1-4% p/mo | 1-3 business days |
| Business Line of Credit | $1k to $250k | Starting at 1% p/mo | 1-3 business days |
| Receivables/Invoice Financing | $10k-$10m | Starting at 1% p/mo | 1-2 weeks |
| Equipment Financing | Up to $5m per piece | Starting at 3.5% (SBA) | 3-10+ business days |
| Revenue Based Business Loans | $10K – $5m | Starting at 1-6% p/mo | 1-2 business days |
With us as your funding provider, you can borrow up to $1 million, with terms of up to 24 months. Here’s how to apply:
Before you begin the application process, take some time to make sure this is the right product for your needs and circumstances. Will you be able to use the capital for your desired purpose? Will the repayment structure do more good than harm to your operating capital? Do you know exactly how much funding to request? Answering these questions ahead of time will make the rest of this process much more manageable.
The application requires the following documents and information:
United States Driver’s license
Voided business check
Business bank account statements from the past three months
Credit card processing statements from the past three months
You can begin the application process by calling us or filling out our one-page online application. At this stage, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This will ensure that there are no surprises or hidden fees during repayment.
The process generally takes a few business days, and once you’ve been approved, the cash should appear in your checking account in 1-2 business days.
A small business loan isn’t just a way to get financing. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the small business loan product you get, make all of your required payments on time and in full. If you get a business line of credit or another revolving product, keep your balance below the limit. If you took an accounts receivable financing product, you hope your customers pay their invoices on time so the financing company can collect on them.
Consistently making payments on time and in full to your merchant cash advance company will positively impact your FICO scores. And that means preferred rates and terms when you next need a small business loan.
If your merchant cash advance application gets declined, it might be because your operating capital cannot withstand the daily repayment structure or there’s an issue with your merchant account. In this case, we – and other responsible merchant cash advance lenders – will recommend another product that puts less pressure on your operating capital and is easier to repay. Other options include accounts receivable factoring, equipment loans, or working capital loans.
If a business owner cannot afford more debt now, we might recommend a different financing tool or loan options. Possible examples include business credit cards or personal loans. Either option can help you build credit and will likely be easier to qualify for than small business loans.
Suppose you were declined a merchant cash advance because of poor Fico scores. In that case, you should consider these credit repair services to help with your personal credit and the appropriate business credit bureaus. They can help you boost your credit scores with personal and business credit bureaus by identifying the issues keeping your score down and creating a plan for eliminating them. Often, these are easy fixes – such as paying off payday loans or reducing personal debt. This effort paves the way toward a future merchant cash advance and potentially small business loans at better interest rates.
A Merchant Cash Advance is repaid to the MCA provider by taking a cut of your daily future credit card sales. This cut is called the holdback rate, and typical holdback rates range from 5 to 12%. So, let’s use retail businesses as an example. Your retail shop does $5000 in daily credit card sales, and you agreed to an 8% retrieval rate. The MCA provider automatically gets repaid $400. You get the other $4600 straight into your checking account.
Because the fund transfer happens automatically between your credit card processor and merchant cash advance providers, you never have to worry about late fees on your merchant cash advance. Since repayment doesn’t depend on your ability to pay on time, there’s nothing to report to a credit agency.
Merchant cash advance rates and fees can vary widely depending on the provider and the business’s creditworthiness. Here are some common rates and fees associated with merchant cash advances:
Understanding these rates and fees is crucial for business owners to accurately assess the cost of a merchant cash advance and compare it with other financing options.
Yes, this product is available to small business owners with bad credit. Remember, your borrowing amount is based almost entirely on your daily or weekly debit and credit card sales. Since the repayment structure of a merchant cash advance is naturally expensive, borrowers are expected to have bad FICO scores. However, your FICO scores will impact the product’s cost and terms. Thus, consider our credit repair services before applying if you’re looking to access the lowest possible rates.
Merchant cash advance providers usually want to see at least your last three to six months of credit card volume. They want to see how much your business typically processes in card sales. This information helps the funder determine how much cash they’ll advance you and under what terms.
This massive misconception about merchant cash advances originates from the loose requirements of a merchant cash advance. But the truth is, bad credit does not mean your business is failing. Many small business owners have trouble because they have no choice but to use personal credit cards to keep their business alive when they hit an early speed bump.
Also, bad credit is far from the only reason to seek a business cash advance. Since this product is not categorized as a “loan,” it does not show up as a “debt” or a “liability” on your balance sheet. If you already have too many liabilities, adding another could hurt your business credit scores and make obtaining trade credit from vendors difficult.
In most cases, a merchant cash advance will allow you to receive anywhere from 50% to 150% of your average debit and credit card sales. This average is based on data from bank statements and credit card payment information from the past three months. However, more significant amounts can take slightly longer to appear in your business checking account.
Whether or not a merchant cash advance is a good idea depends on the specific circumstances of the business considering it. MCAs can provide quick access to funds for businesses that may not qualify for traditional loans, but they often come with high fees and interest rates.
It’s essential for business owners to carefully weigh the costs and benefits of a merchant cash advance before deciding if it is the right choice for their situation. Consider factors such as the urgency of the need for funds, the ability to repay the advance quickly, and the overall impact on the business’s finances before making a decision.
No, a merchant cash advance is not a loan. While there are some similarities, an MCA is technically a purchase of future receivables in exchange for an immediate advance at a discount. While you can think of the factor rate as interest, it’s technically the discounted rate for your receivables.
Most lenders consider the volume of credit card sales when determining eligibility for an MCA. While merchant cash advances can be expensive, they can also be useful for business growth. Here are some ways that business owners can use a merchant cash advance to grow their business:
Using a merchant cash advance strategically can help business owners achieve their growth objectives and improve their overall financial health.
A business credit card can be a better option than a Merchant Cash Advance for several reasons. Credit cards offer more flexibility in terms of repayment options compared to a Merchant Cash Advance, which typically requires a fixed percentage of daily sales.
With a credit card, you can choose to pay off the balance in full each month or make minimum payments, giving you more control over your cash flow. Additionally, business credit cards often come with rewards programs that can help you earn points or cash back on your purchases, providing an added benefit for using the card for business expenses.
However, a merchant cash advance can be a better idea than a business credit card when a business needs quick access to capital without the hassle of a lengthy application process or strict credit requirements. Merchant cash advances are based on future credit card sales, making them ideal for businesses with fluctuating revenue streams.
Additionally, merchant cash advances often have more flexible repayment terms compared to traditional business loans or credit cards, allowing businesses to manage their cash flow more effectively. Overall, a merchant cash advance can be a good option for businesses looking for fast and flexible financing solutions.
One of the primary benefits of a merchant cash advance is that it’s typically much easier to apply for than other funding options. Most lenders allow applicants to apply for MCAs online, simplifying the application process. Applicants can typically get a decision on their MCA application in a few hours to a few days.
Most MCA providers will look at the average credit card transactions of a business to assess repayment capacity. Some lenders may require applicants to demonstrate consistent credit card sales over the last two or three months. Many lenders require businesses to provide recent credit card processing statements during the MCA application process. Commonly required documents for applying include business statements, identification, and sales receipts.
Since MCAs are not considered loans but rather a form of financing based on future credit card sales, they may not always be reported to credit bureaus. However, defaulting on an MCA would cause hefty fines and financial strain that could lead to missing payments.
In addition, some providers may have a provision to report delinquent payments or defaults to the credit reporting agencies. It’s essential to carefully review the terms of any Merchant Cash Advance agreement and ensure you have a clear plan for repayment to avoid any negative impact on your credit score.
UCS offers various financing options, including term loans and working capital loans. While merchant cash advances can provide quick access to capital, they can be expensive and may not be the best option for every business. Fortunately, there are several alternatives to merchant cash advances that small business owners can consider:
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