Merchant Cash Advance

Businesses have many options when it comes to financing. While loans are still the go-to choice for businesses, alternative methods of financing are becoming increasingly popular.

A merchant cash advance is one form of alternative small business funding. Although it offers many advantages, like other forms of financing, there are drawbacks that need to be considered. It’s important to have a complete understanding of merchant cash advances so that you can make an informed decision for your business.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a type of advance based on the credit card sales of a business. Funds are received in one lump sum, and the advance is repaid through a percentage of future business sales.

Each day, a percentage of your daily credit card payments will be withheld to repay the advance (known as a holdback). These payments will continue daily until the MCA is paid in full.

Interest rates and financing amounts vary depending on the lender. Repayment terms are generally less than three years, with some being as little as a few months.

An MCA can be approved in as little as 24 hours and very little paperwork is involved.

Businesses may consider an MCA if:

  • They have high credit card sales volume
  • They do not qualify for a traditional loan
  • They need funding quickly

Merchant cash advances are only available to businesses that process credit card payments. Businesses that do not accept credit cards cannot take out an MCA.

Interest rates on merchant cash advances can be very high and are determined by a factor rate. The APR and factor rate will be dependent on your sales performance. The higher the volume of credit card sales, the lower the rate. See if your business prequalifies here.

The factor rate will be based on:

  • Monthly credit card sales volume
  • The amount of funds the business received
  • The time it takes to repay the money

Due to the way MCAs are processed and repaid, lenders have minimal credit requirements. If a business has no credit or the owner has bad personal credit, an MCA can still be approved as long as the business’s sales meet the lender’s requirements.

The Benefits

A merchant cash advance offers a number of benefits to business owners.

Quick Form of Financing

An MCA can be approved in as little as 24 hours, and funds are deposited quickly after approval. Businesses get fast access to cash when they need it most.

Loans can take weeks or months for approval and disbursement. If you’re faced with an emergency expense, you may not have this much time to wait.

Minimal Credit Requirements

Credit isn’t the top priority when it comes to MCA approval. If you have bad credit or thin credit, that’s okay. What matters is your credit card sales volume. If your business receives a high volume of credit card sales, you can be approved for a merchant cash advance.

No Collateral

When you take out an MCA, there’s no need to put up collateral. The advance is repaid through your future sales, so the risk is lower for lenders.

Flexible Use

A merchant cash advance can be used however you choose. Whether you need working capital or quick cash to cover an emergency building repair, an MCA can get you quick cash for whatever you need.

The Disadvantages

Merchant cash advances offer many advantages, but they also have some drawbacks that need to be considered.

Higher Interest

An MCA offers quick and easy approval, but that convenience comes at a cost. Merchant cash advances come with much higher interest rates, so they can be quite expensive.

The required minimum daily payments can also hurt your cash flow over the term of the loan.

Must Accept Credit Cards

If your business doesn’t accept credit card payments, a merchant cash advance won’t be available to you.

A merchant cash advance may be a good option for businesses that need money quickly or cannot get approved for a loan. MCA approvals are quick, but this type of financing comes with a higher interest rate and requires your business to accept credit card payments. It’s important to weigh the pros and cons carefully to determine whether an MCA is the right choice for your business. Get the merchant cash advance from Sutton Funding here. 

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Henry Gross

Henry Gross

Henry Gross is the managing partner at Sutton Funding.

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