Merchant Cash Advance Buyer's Guide

merchant cash advance

What is a Merchant Cash Advance?

Merchant cash advance is a type of funding that is not a loan. Rather, it is a purchase and sale agreement, where, the fund provider buys the right to take money from your business credit and debit card transactions and sells those rights back to you for a fee. With a merchant cash advance, a lender provides unsecured capital to business owners in exchange for a percentage of future debit and credit card sales. The cash advance amount is predetermined based on a business’s average monthly volume of credit card sales. There is no interest, only a provider’s fee that is agreed upon by the lender and the borrower from the start. There is likewise no preset time to pay back. Repayment is determined by a set percentage the lender will receive of future sales transactions. MCA is risky for the provider, so you can expect to pay a steep premium for funds (sometimes as much as 40%).

Typical Uses

MCA can be used for almost any business expense, including:

merchant credit card machine
  • Help with temporary cash flow
  • Pay debt or a tax bill
  • Expand facilities or open new store location
  • Purchase new equipment or inventory
  • Take advantage of short-term purchasing opportunities (sales/liquidations)
  • Invest in new marketing activities or advertising
  • Unplanned expenses

Merchant Cash Advance vs. Traditional Bank Loans 

Many businesses in need of funding will often consider a traditional loan prior to applying for a merchant cash advance. Securing a traditional loan can be difficult. Not only are you required to fill out extensive paperwork, but you also have to endure a lengthy background and credit check, as well as provide collateral. All this, to then wait weeks for funding or even worse, to not be approved at all! A merchant cash advance is a viable option if you do not qualify for a loan or need fast cash with less documentation than a standard loan requires.

A merchant cash advance offers two distinct advantages: They are FAST and FLEXIBLE.

  • Fast approval time and fast funding. Approval time is decreased because minimal paperwork and documentation are required. MCAs typically require a one-page application, no collateral, and minimal credit check.
  • Flexible repayment terms. The payment schedule is adjustable in that the lender and borrower come to terms on what percentage of credit card sales will be taken and how long it will take to pay the fee for the funds.

Unlike a traditional loan, which is repaid on a fixed schedule (typically weekly, biweekly or monthly), a merchant cash advance is repaid daily.

Read more: MCA vs. Traditional Loan

How it works 

Basically, any business that accepts credit or debit cards is qualified for a merchant cash advance, and most providers will approve about 95 percent of qualified applications.

Merchant cash advance providers measure their fees with a factor rate instead of an interest rate. As a result, there is no interest on the money borrowed, just a provider’s fee that is agreed upon by the provider and the customer right from the start. In return for the lump sum, the customer agrees to pay back the balance with a percentage of their daily credit and debit card sales.

To determine the total amount to be repaid, the customer will multiply their advance amount by a factor rate (provided by the supplier). This can typically run anywhere from 30% all the way to up 200% APR.

Learn more: Merchant Cash Advance: How it Works.

credit card

Pros and Cons

Because a merchant cash advance is readily accessible to any business that accepts credit and debit cards, it has become an appealing option for quick funding. However, a merchant cash advance isn’t for everyone. Like any financial product, a merchant cash advance has both advantages and disadvantages.

General pros and cons include:

MCA pros and cons

Choosing a Provider 

While the merchant cash advance industry is still relatively new, a variety of businesses are already claiming their share of the growing market. Providers can range anywhere from small, independent companies whose focus is primarily merchant cash advance, to large merchant account providers who may offer this type of funding as a secondary part of their service. So how do you choose the right one for your company?

Before choosing a provider, you make sure the company takes the time to understand your business cash flow needs and determines a rate that allows you to get the funding you need without compromising your business stability.

What to look for in a provider:

  1. Reliable customer service – you need to be confident the provider will be there when needed
  2. Level of interest – quality providers will learn as much as possible about your business funding needs
  3. Upfront about transaction – a good provider will help you understand how the process can benefit your business, but will also be honest if repayment terms are unfavorable
  4. Financing experience – since this is still a relatively new business, it’s important to know if providers are just chasing the latest hot trend or if they have real experience helping other businesses through financial hardships

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