Everything You Need to Know About Merchant Cash Advances
By Alexandra Sheehan
Though entrepreneurs are a resilient, determined bunch, 30% of ventures fail because they run out of money. And when options like small business loans, credit cards, investors, and even grants are out of reach, it might feel like you don’t have any other options.
Enter merchant cash advances.
Merchant cash advances are ideal for established businesses with lots of revenue but bad credit — especially if you’re in a tight spot and need cash. Fast.
Below, we’ll look at what merchant cash advances are, pros and cons, and how to get one for your business.
What are merchant cash advances?
Merchant cash advances (MCAs) are when lenders give businesses a significant amount of money in exchange for a portion of their daily credit card receipts, as well as any other fees. Typically, this is 20%, but rates vary depending on the lender. Merchant cash advances are only available to established qualifying businesses. You’ll have to meet minimum requirements for average monthly credit card transactions.
What’s the difference between a merchant cash advance and a small business loan?
Merchant cash advances and small business loans both give businesses access to fast cash when they need it in exchange for a fee. However, the way the lender collects this fee is different in both cases. MCA repayment comes from future credit and debit card transactions, whereas small business loans are repaid in regular (typically monthly) installments with added interest. Additionally, small business loans offer more options for new businesses with limited financial history.
Pros and cons of merchant cash advances
While MCAs sound great — and they can be — there are both pros and cons to using it to fund your business.
- Get cash fast. MCAs don’t require lots of paperwork and lengthy application processes. If you’re really in a bind and need money quickly, an MCA is a great option. Sometimes it can take less than a week.
- No collateral needed. This offers better protection of your personal and business assets in the case that you’re unable to repay what you owe. Because MCAs take a portion of future credit and debit card sales, if you don’t have any, you won’t have any money to give. Make sure they don’t try to sneak any changes to this premise in the paperwork you sign.
- Pay back what you can. To piggyback on the above point, you only repay the MCA if you transact card payments. Your repayment scales with your sales.
- You can have bad credit. Even if you have limited or poor credit history, you can still qualify for an MCA. Lenders mostly look at credit card transaction history and projections.
- Flexible spending. While many loans and other financing options require you use the funds for a specific purpose, merchants can use the money from an MCA to their discretion.
While MCAs might sound great, there are some downsides to consider and pitfalls to avoid:
- High interest rates. While you make payments at a rate your business can afford, your total repayment amount is likely to be higher with a MCA than other funding options.
- No way to lower your total repayment. With small business loans, you can pay ahead of schedule to reduce the total loan amount. With MCAs, you borrow a fixed amount of money in exchange for a fixed amount of money. There are no incentives for early repayment.
- Lack of federal regulation. While small business loans are federally regulated, which offers merchants protections, MCAs are commercial transactions. As such, they are regulated at the state level, which offers lenders more flexibility and fewer protections for borrowers.
- Aggressive repayment makes it difficult to eradicate debt. Because MCAs are an easy way to get cash quickly, it’s also easy to fall into the trap of piling up more and more debt. MCA repayments can be dragged out, and it affects every credit and debit card transaction. American Express, for example, claims that more than 70% of merchants return for additional borrowing.
- Confusing terms and conditions. If MCAs sound a bit complicated, that’s because they are. It’s easy to be intimidated as a small business owner with your back against the wall. Contracts and repayment schedules are confusing, it’s difficult to compare MCA options, and they can have aggressive terms which limit borrower protections.
How merchants can get cash advances
Before starting your application for a MCA, it’s a good idea to research lender options. Fit Small Business recommends the following:
It’s not a bad idea to get a quote for an MCA from each of the above options, as well as any others that come recommended to you in your own research.
Getting a quote for an MCA typically involves filling out an online form with basic information about you and your business. This information includes your name, address, business name, annual sales, time in business, and more. Many brokers also offer phone applications.
Quotes are individual to each merchant. Once you receive your quotes, you can compare your options, try to negotiate terms, and then select the one that makes the best sense for your needs. Read paperwork thoroughly and ask your attorney to review it as well. You want to make sure the terms are fair to both parties.
After you’ve signed and agreed, you’ll receive your cash, usually in a matter of days. Brokers will often link their software and systems up to your credit card processor and/or merchant account to automatically withdraw your payment installments.
How much do merchant cash advances cost?
We mentioned earlier that MCA repayment happens as a percentage of credit and debit card transactions. This is often true, but there are also instances where merchants pay in daily or weekly installments. This is a flat amount, regardless of how many sales you make in that period.
MCA costs vary. There is the principal amount, the interest, and the additional fee. Generally, interest rates can be anywhere from 4% to 40%, and even higher in some cases.
Moving forward with your small business money needs
It’s important to take control of your cash flow and find creative ways to fund your business during tough times. Merchant cash advances offer a quick way to get cash for merchants that have trouble securing small business loans and other funding options. It’s easy, fast, and convenient — but not without its downsides like high-interest rates and complicated fee structures.
To take more control of your money and credit card processing, check out these resources next: