What is a Merchant Cash Advance?

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what is a merchant cash advance

If your business needs money, but can’t get a traditional loan due to little collateral, poor credit scores, or a short business history, you aren’t out of options quite yet: a Merchant Cash Advance (MCA) provider might be willing to advance you money—and fast. Unfortunately, with such high fees and the ease of which they provide people with money, MCAs initially sound like bad news. However, cash advances can work quite well… for the right business. Read on to learn how MCAs work and if they’re right for you.

How Merchant Cash Advances Work

The Basics: What Is a Merchant Cash Advance?
A merchant cash advance is a form of lump sum cash advance in which the provider will give you a certain amount of money in exchange for a cut of all debit and credit card sales until the money and added fee is payed off. Generally, cash advance providers partner with a merchant account provider to take the money directly off your sales at the end of the day.

The deal would look something like this: you need $25,000, so the provider gives it to you with a factor rate of 1.17, which means that you eventually have to pay $29,250 back. If the provider is taking 15% of your debit/credit card sales (the withholding rate), and you expect to have an average of $30,000 per month in sales, you’re looking at a payment of $150 per day, or $4,500 per month.

MCA vs. a Traditional Loan
If you think that “lump sum cash advance” is just a fancy way to say “loan,” think again—a cash advance is “technically sales of future assets,” which means that MCA providers are not subject to the same laws and regulations that other loaning agencies are. While the factor rate of the theoretical MCA above was 17%, traditional loan interest rates are prohibited from charging nearly that much money. For example, SBA loans are currently not allowed to charge more than 6.5% on a loan that size.

However, cash advances are ideally paid off in less than a year. Bank loans are not. If you take three years to consistently pay off a $25,000 bank loan at a fixed interest rate of 6.5%, you will pay a total of $27,584. At five years, you’re looking at $29,349. In other words, it would take you many years to rack up interest as large as a cash advance fee. Cash advances will generally be more expensive, but not always. Regardless, you will be paying off more money in a much shorter amount of time.

Of course, if you are considering a cash advance, it doesn’t matter how it differs from a bank loan because you probably can’t get the latter. Let’s talk about how MCAs are potentially better than a traditional loan.

The Pros

Leniency
MCA providers are much more lenient about who they give money to. They don’t pay very much attention to credit scores (instead they look at future sales projections), and don’t ask for collateral.

Their application processes are also much easier. Traditional loans require in-depth information of everything under the sun: business plans, your credit report, income tax statements, financial statements, legal documents, collateral, your previous business experience, and basically your entire life story. On the other hand, this person had to show his cash advance agency his sales report, credit score, and his company agreement. He got the loan.

Fast Money
The application process for MCAs tends to be much shorter than traditional loans. Since they don’t require as much paperwork, they can process the deal very quickly. It’s not uncommon for a business owner to have the money in-hand less than 48 hours after applying for a cash advance.

No Fixed Payments
Business not doing terribly well this month? Have a business that does better during certain seasons? Not a problem for a cash advance. Since they take a cut of your profits, the less you’re profiting, the less they’re taking. A good cash advance provider will give you a withholding rate that your business can handle–businesses making a large profit might get a rate like 15% or 25% (or higher), whereas those that have less margin for error could get a rate like 10%.

Who Might Benefit

Cash advance providers generally go for businesses like restaurants, retail, and service industries—ones that often don’t have a lot of collateral and also tend to process a high amount of debit and credit cards.

More specifically, advances tend to work better for businesses that are growing fast and need a bit of money to close the gaps. These businesses can absorb the large fee because they’re making enough money that the loss in daily profit isn’t a problem.

Unfortunately, if your business is failing, MCAs might not be the best way to go. Theoretically, you have nothing to lose if your business does fail—since there’s no collateral, the provider is assuming all the risk. If you could even get an advance in the first place, there are so many stories about businesses owners being sued by cash advance companies after closing down that I would be wary of losing a large sum of somebody else’s money.

The Key Word is “Breakneck”

You get the money fast, you pay the agency back fast, and then you’re done. If you think that your business can do that, and you have no other options, consider getting a merchant cash advance. There is nothing wrong with this type of loan, but they don’t work for everybody.

Regardless of what you do, look at all the numbers to ensure that your business could handle the advance. If your business could not handle the reduction in daily profit, don’t get one. If your business couldn’t handle the steep fee, or couldn’t pay the loan back in a timely manner, don’t get one. Because unlike banks, cash advance providers do not do all the homework—you are responsible for ensuring that the MCA fees are manageable.

Bianca Crouse

Bianca Crouse

Bianca is a writer from the Pacific Northwest. As a product of the digital age, she likes absorbing large amounts of information and figures she might as well pass it on. When not staring at a screen, she is probably foraging for food outside, playing board games, or harassing somebody with theories about that movie she just watched.
Bianca Crouse
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4 Comments

    Tak Ogihara

    hi, great article. Can you now point us in the right direction for finding and choosing the right merchant cash advance?

    Bianca Crouse

    Hi Tak,

    I’d recommend taking a look at our merchant cash advance comparison chart and our full list of MCA reviews.

    Sam Fisher

    For somethings like this, is it always a variable payment? I’d think that you would want a fixed payment so that way you could plan your budget accordingly. However, I’m sure that it works out either way.

    Bianca Crouse

    Hi Sam,

    Merchant cash advances are always variable. The idea is that the repayments will fluctuate along with your cash flow. However, most cash advance providers also offer a fixed fee short term loan, which is like a cash advance, but repayments are fixed. And you are correct, a lot of people prefer the fixed repayment method over the variable method of merchant cash advances.

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