Merchant cash advance (MCA) offers businesses an alternative over other small business financing options. Unlike different types of business funding that require lengthy applications and strict terms, MCAs provide fast and flexible funds to small businesses.
45% of businesses fail within the first five years of being open, and one of the top reasons that businesses do not succeed is that they don’t have enough funding. From marketing costs, purchasing inventory, paying employees, unforeseen emergency costs, repairs, and a million other things, there is no shortage of necessary business expenses at any given time.
For businesses that need short-term funding, fast, merchant cash advances could be a perfect fit. However, before running to the nearest underwriter, we recommend doing your research first. Learning how an MCA works, when to get an MCA, and the potential pros and cons is a must if you want to determine whether or not an MCA is a good idea for your business.
This article will cover all the ins and outs of MCAs, let’s get started.
What is an MCA?
In short, a merchant cash advance is a funding option for small businesses in which an underwriter provides a business with an advance on their future revenue in exchange for a percentage of the business’s future sales.
How Does MCA Work?
An MCA works a little bit differently than traditional business loans. Most business loans require the borrower to put up collateral in order to secure the loan. Collateral is usually large assets that a business has like property or expensive equipment. The collateral is used as security for the lender. If the borrower can’t pay back the loan for whatever reason, the lender is allowed to take the assets as payment instead.
MCAs on the other hand are unsecured, meaning the borrower doesn’t have to put up collateral in order to be eligible. This is an important detail, especially for businesses that are just getting on their feet and don’t have any assets to put up, but still need funding.
Another difference between merchant cash advances and “regular” business loans is the way terms. The terms of a loan will state the amount the borrower has to repay every month over a predetermined period of time in order to pay back the loan. This is usually a fixed monthly payment, no matter how good or bad your business has done with sales,
Merchant cash advances do not work this way. Instead, businesses pay for the lump sum with a percentage of their sales. The payments can be done daily, weekly, or monthly depending on the terms of the MCA. This means that if your business did exceptionally well with sales this month, you will repay the lender more quickly than in months with fewer sales.
MCA Pros and Cons
When determining whether or not an MCA is a good idea for your business, we love a classic list of pros and cons to see if it helps tip the scales in either direction. The truth is that every type of business loan will have pluses and minuses, so keep that in mind.
Let’s review some MCA benefits and pitfalls.
Merchant cash advances have the highest approval rate out of all types of business financing, standing at 84% in 2020. To put it in perspective, traditional business loans have a 67% approval rate. Merchant cash advance application requirements are more flexible than traditional loan applications. and are also usually approved within 72 hours.
Another pro is that MCAs are accessible to small businesses that can’t put up collateral and oftentimes do not need to have much credit. Startups and newer businesses often run into issues with other types of business loans because of the lack of these things.
MCAs are flexible both in terms of what your business can use the funding for and in terms of repayment options. Depending on what your business can afford, repayment percentages usually range between 5% and 20%.
Payment terms for a merchant cash exchange are also dependent on your sales, which means you won’t be stuck paying high fixed-rate payments during slower months.
MCAs may be fast, but they are not always cheap. Depending on the merchant cash advance company you borrow from, fees can be for up to 50% of the original lump sum. It is important to pay attention to the terms so as not to sign off on something that will end up being much more expensive than your business can afford.
MCAs are not perfect for every situation. If you are looking for a long-term funding solution, a merchant cash advance is not right for your business. MCAs offer short-term funding options only.
If your MCA terms require weekly or daily payments, these frequent payments can add up, especially during slower months.
Also, if your business works with cash instead of credit, MCA lenders are more likely to deny your application. This is because the repayment works with card turnover.
When to Get an MCA
A merchant cash advance is not a one size fits all funding solution for every business. However, if you are a small business that needs cash immediately to cover short-term expenses or cover cash flow shortages, MCA is the thing for your business.
That said, remember that merchant cash advances can be expensive and you don’t want to fall into a cycle of debt. Make sure before applying for merchant cash advance that your business can take on the fees and will be able to repay them without going under.
If you think after reading this article that you want to go the MCA route, we support you! But we recommend taking the time to vet different lenders and carefully review the terms of the merchant cash advance before signing off on anything.
We're working on some pretty cool new pieces of content, including tools that will give you insight into your business finances.
Want to be the first to know when they launch?