Merchant Cash Advances: Are They Right For Your Business?

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Perhaps you’ve heard of merchant cash advances(MCAs) and are wondering if they’re right for your business? Like most financing conundrums, it’s a question without an easy answer. However, it is possible to sketch out a theoretical company that could benefit from a merchant cash advance.

What Is a MCA?

Generally speaking, a merchant cash advance is a sum of money granted to a business is exchange for a cut of future card-based sales (until the agreed upon amount is paid off). At least, that’s what it originally was. MCA can now refer to a number of similar products offered by online funders, including short-term loans. All merchant cash advances tend to have the following things in common:

  • Flat fees: Rather than charging interest, MCAs will assess a flat fee that represents the total amount of money you’ll owe them. Unless special arrangements are made, this amount won’t change no matter how quickly or slowly you pay off the fee. That actually means it can actually be advantageous to pay off the advance over a longer period of time.
  • Term lengths: If you have a traditional advance, you won’t have strict term lengths, although usually your repayments will be structured so that you’ll be paying the advance off in 2 – 16 months. If you opt for fixed payments, on the other hand, your repayment schedule will be more set in stone.
  • Factor rates: Since we’re dealing with flat fees rather than interest rates, online funders use what they call factor rates to determine how much you’ll be charged for their service (not including origination fees). These rates are usually expressed as a decimal, though some companies will use a percentage. The factor acts as a multiplier. So, for example, if you accept an advance of $10,000 at a 1.3 factor rate, you’ll owe $13,000, or $1.30 for every dollar you borrow.
  • High frequency of repayments: Most MCAs require automatic payments to be made every business day, though some companies accept weekly payments. These will be in the form of either automated clearing house (ACH) debit from your business account or a percentage of your daily card-based sales.
  • Expensive rates: High rates are the gasoline that makes online funding run, so be prepared to pay quite a bit for the money you receive. It typically would take years for a traditional bank loan to rack up an amount of interest equal to the flat fees of MCAs.

Are MCAs Right For You?

With all that in mind, we come back to the original question: is a merchant cash advance right for your business? If your business is considering a MCA, you should match at least one of the following traits:

  1. You need funding quickly. One of the biggest advantages online funders offer is a quick application process. Most allow you to begin the process online, will return your query within 24 hours and, if you qualify, can get your funding to you within 24 – 72 hours. This can be handy when you encounter unforeseen or catastrophic one-time costs and don’t have an existing line of credit to call upon.
  2. You have poor credit. As a general rule, MCAs care about your sales much more than they care about your FICO score. If banks run away hissing and shrieking like vampires before a crucifix whenever they see your credit score, then traditional lending sources may be unavailable to you. That isn’t to say that MCAs completely ignore credit—in fact, many of them will do at least a soft pull on your credit before extending an offer. Your credit rating isn’t completely irrelevant. Many MCAs do require a hard minimum credit rating and almost all of them will factor it into the rates they offer you. But if you can clear a FICO score of 500, you probably won’t be disqualified for credit.
  3. Your business makes relatively high volumes of daily sales. As MCAs are advances against your future earnings that are typically paid back daily, most online funders will want to ensure that they’ll be making some money every day. This means that certain industries, such as those that make infrequent big ticket sales, aren’t a great fit for the MCA model. Online funders will often provide a list of the types of industries they’re willing to fund and the circumstances under which they’ll fund them. It’s also a good idea for you to be secure in your ability to service your advance for your own sake as the terms tend to be inflexible.
  4. You don’t have collateral. Loans can be difficult to acquire when you don’t have much in the way of assets. As unsecured financial products, MCAs rarely require formal collateral, though you should expect a UCC-Blanket Lien.
  5. You own a controlling share of your company. Many MCAs will only work with individuals who own at least 50 percent of their company.

The Takeaway

You’ve probably heard that MCAs should be approached with caution, and you won’t hear differently from us. That said, these loans are popular for a reason: they fill a useful business funding niche. If you own a small company with a tidy revenue stream that needs money quickly, you might find that a merchant cash advance is a good fit for your business.

Chris Motola

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he's not pushing keys or swiping screens, he's probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.
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