What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a financing option that quickly provides cash for businesses. It is designed for small business owners who need money but don’t meet a traditional loan’s credit requirements.

A traditional loan might be a better option for businesses with long operational histories and more substantial credit scores. However, for companies that have only been around a short while and have a poor credit history, alternative financing options are most likely a better option than dipping into your personal funds. Let’s take a closer look at what a Merchant Cash Advance is.


The History of MCAs

MCAs date back to the late 1990s and their rise in popularity coincided with the rise of online small-business loans. Barbara Johnson, an entrepreneur running four franchises of Gymboree Playgroup & Music, needed money for a summer marketing campaign. She devised a way to borrow against the uptick in credit card sales from families returning for fall classes.

In 1998, Barbara and her husband, Gary, co-founded Advance Me and took out a patent for the technology that allowed credit card sales splitting.

Her system works similarly today to how it did back then: An MCA supplier would purchase an agreed-upon amount or percentage of future debit or credit card sales. Barbara’s system of leveraging future receivables allowed her, and many since then, a way to level out seasonal revenue dips.

Historically, MCAs have been for businesses whose revenue is derived primarily from debit and credit card sales, including retail shops and restaurants. Today, MCAs are also used by companies that don’t rely heavily on debit or credit card sales.


MCAs Are Not Loans

Businesses can utilize these short-term funds to cover expenses during slow business periods. They are not loans, and payment remittals to the MCA funding company fluctuate in tandem with your revenue. MCAs are, in some ways, comparable to paycheck advances, except they apply to businesses rather than individuals.


How Merchant Cash Advances Are Paid Back

Rather than charging interest like a business loan, MCAs apply factor rates to the funds being advanced. The MCA issuer purchases additional revenue from your business based on the factor rate. For example, with a factor rate of 1.30, they are buying $1.30 in future income at a discounted rate of $1 now.

The business owner pays off the MCA with a daily remittal, usually through an Automated Clearinghouse (ACH) payment, until the funding company has received the full agreed-upon amount. MCAs are usually set up so that the ACH payment transfer is predictable but collecting a percentage of your company’s sales for a set number of days.


MCA Underwriters Look Beyond Your Credit History

When deciding to advance the money, MCA underwriters don’t consider your personal or company credit history, credit scores, or the length of time you have been in business.

Instead, they examine your past and future business revenue, especially receivables collected through credit, debit, or charge cards. An MCA provider generally expects to see:

  • An operational history of at least one year.
  • Less than 10 nonsufficient funds, or bounced checks, in a month.
  • A sufficient daily balance in your bank account.
  • At least 10 monthly deposits from unassociated customers.


MCA Pros and Cons

Before considering an MCA, take a look at the pros and cons.



Reasons you may want to consider an MCA include:

  • Fast funding — Relative to other forms of financing, MCAs are fast. After applying and assuming you qualify, it can take only a few days to receive your funds.
  • Good credit is not required — MCAs are a viable option even for businesses with poor credit history. MCA eligibility is chiefly based on your company’s cash flow and sales volum
  • Flexibility — Repayment obligations are tied to your business’s revenue, which helps if your cash flow fluctuates. This means when sales slow, so do your payments and vice versa.



Reasons you may want to avoid an MCA include:

  • Expense — Generally, MCAs cost more than loans or other financing methods since their risk is tied to a business’s revenue.
  • Penalty for paying early — Since your factor rates are not amortized, if your business increases its revenue and you pay back the cash advance ahead of schedule, your rate increases.
  • You pay for funds even when not using them — When you are advanced $50,000 from an MCA provider, that will never change. You pay back that amount whether or not you use it, plus the associated factor rate agreed upon when you signed the contract. You are essentially paying for the funds, even if they just sit in your account.


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