Merchant Cash Advance
I. Understanding merchant cash advances
What is a merchant cash advance?
A merchant cash advance (MCA) is a B2B credit product that provides upfront capital in exchange for a percentage of future credit card and debit card sales. Unlike traditional loans, MCAs aren't technically loans at all—they're cash advances against future receivables, which affects how they're structured and regulated.
Businesses receive a lump sum payment and then repay the advance through daily or weekly deductions from their credit card processing revenue. This structure makes MCAs particularly appealing to businesses with strong card sales but limited access to traditional bank financing.
How does a merchant cash advance work?
The MCA process begins when a business applies for an advance based on their historical credit card processing volume. Providers typically review three to six months of processing statements to determine how much they're willing to advance and what percentage of daily sales they'll collect.
Once approved, the business receives the advance as a lump sum. Repayment happens automatically through the business's payment processor, which deducts the agreed-upon percentage from each day's credit card sales. On slow sales days, less money is collected; on busy days, more is collected. This creates a repayment schedule that fluctuates with business performance.
The advance continues until the full amount plus fees is repaid. Some agreements include daily minimums to ensure steady repayment even during slow periods, while others are purely percentage-based with no minimum collection requirements.
Key differences between merchant cash advances and traditional business loans
MCAs differ fundamentally from traditional business loans in structure, qualification requirements, and cost. Here's how they compare:
These differences make MCAs attractive for businesses needing quick capital, but potentially more expensive for long-term financing needs.
II. Practical considerations for merchant cash advances
Typical repayment terms for merchant cash advances
Most MCAs collect between 10% and 20% of daily credit card sales, though percentages can vary based on the business's risk profile and processing volume. The holdback percentage determines how quickly the advance is repaid—higher percentages mean faster repayment but more impact on daily cash flow.
Repayment periods typically range from 3 to 18 months, depending on the holdback percentage and the business's sales volume. Businesses with consistent, high-volume card sales repay faster than those with seasonal or irregular revenue patterns.
Some providers offer split-funding arrangements where different percentages apply to different types of transactions, allowing for more customized repayment structures based on the business's specific processing mix.
Rates and fees associated with merchant cash advances
MCA costs are expressed as factor rates rather than annual percentage rates. A typical factor rate might be 1.2 to 1.4, meaning a business receiving a $100,000 advance would repay $120,000 to $140,000. While this might seem reasonable, the actual annual percentage rate often exceeds 40% due to the short repayment periods.
Additional fees can include origination fees, processing fees, and early payment penalties. The fast repayment schedule means businesses pay the full factor rate over just months rather than years, creating effective interest rates much higher than traditional loans.
Consequences of defaulting on a merchant cash advance
Since MCAs are structured as purchases of future receivables rather than loans, traditional bankruptcy protections may not apply. Many MCA agreements include personal guarantees from business owners, putting personal assets at risk in default situations.
Providers may pursue aggressive collection tactics, including freezing bank accounts or filing liens against business assets. The automatic deduction structure means providers have direct access to processing revenue, making it difficult for businesses to avoid payment.
Pros and cons of using merchant cash advances
MCAs offer several advantages for businesses with specific needs. Quick approval and funding can address urgent cash flow needs when traditional financing isn't available or takes too long. The flexible repayment structure adjusts to business performance, providing relief during slow periods. Qualification requirements focus on sales volume rather than credit scores, making MCAs accessible to businesses that might not qualify for bank loans.
However, the high effective cost may make MCAs expensive compared to traditional financing, as the daily deductions can strain cash flow for businesses with thin margins.
III. Application process and eligibility for merchant cash advances
How can a business apply for a merchant cash advance?
The MCA application process is typically streamlined compared to traditional business lending. Most providers require basic business information, bank statements, and three to six months of credit card processing statements showing transaction volume and consistency.
Many applications can be completed online with decisions rendered within 24-48 hours. Providers focus primarily on processing volume trends rather than detailed financial analysis, making the underwriting process faster but less comprehensive than traditional lending.
Some providers offer pre-qualification tools that give businesses preliminary estimates based on processing volume without requiring full applications or credit checks.
Eligibility requirements for merchant cash advances
Primary eligibility centers on credit card processing volume and consistency. Most providers require minimum monthly processing volumes, typically $10,000 to $15,000, though some work with smaller businesses. Processing history of at least three months is usually required to establish volume patterns.
Business age requirements vary but typically range from six months to two years in operation. Personal credit scores matter less than for traditional loans, but extremely poor credit or recent bankruptcies may still disqualify applicants.
Alternatives to merchant cash advances
Businesses considering MCAs should evaluate other financing options that might offer better terms. Traditional bank loans typically provide lower costs but require stronger credit and longer approval processes. SBA loans offer favorable terms but involve extensive documentation and long approval timelines.
Business lines of credit provide flexible access to capital with lower costs than MCAs, though they require better credit qualifications. Equipment financing can fund specific purchases at lower rates when the equipment serves as collateral.
Revenue-based financing offers similar flexibility to MCAs but often with better terms and longer repayment periods. Invoice factoring can provide quick cash based on outstanding receivables without the ongoing percentage deductions of MCAs.
IV. Bottom line
Merchant cash advances serve a specific niche in business financing, providing quick capital for businesses with strong card sales but limited traditional financing options. However, the high effective costs and aggressive repayment terms make them suitable primarily for short-term needs where speed is essential.
If you're exploring business financing options or considering adding MCA products to your lending portfolio, reach out to us. We'd be happy to discuss what's worked for other companies in similar situations.