Details on What a Merchant Cash Advance Is, How It
Works, and Whether It’s Right for Your Business

When it comes to financing your business, you’ve got plenty of choices. For organizations with an established history and good credit scores, a traditional loan is a great option. But if you haven’t been in business that long and don’t have an extensive credit history, you will probably need to look at alternative financing.

One of the most popular types of alternative financing is the Merchant Cash Advance (MCA). Here we’ll explore what an MCA is, how it works and whether it could be right for your business.

An Overview of the Merchant Cash Advance

A definition of a merchant cash advance is: A financial transaction between a business owner and an alternative financing company. The company agrees to the sale of a percentage of the business’ future cash flow. The finance company agrees to purchase the business’ future receivables at a discounted rate, essentially “advancing” future business revenue. The business owner pays off the MCA with a daily payment withdrawn until the full amount that was agreed upon has been received by the funder.

Let’s break down what that means.

A merchant cash advance is a type of alternative small business financing. An MCA provider advances you funds now in exchange for a share of your future business revenue until the funds and any fees are paid off. There are several unique aspects of an MCA:

  • MCAs are designed for short-term financing
  • Factor rates are calculated on the amount advanced to you, and are the amount of additional revenue purchased so for example 1.25 for 12 months means you are selling 1.25 of future revenue over 12 months for a dollar received now.
  • MCAs are not loans — instead, they are an advance on the future revenue of your business so that if your revenue decreases the daily amounts remitted decrease as well
  • MCAs are normally structured  through the collection of a percentage of your sales for a set number of days so that the daily ACH transfer is predictable
  • You’ll typically make ACH transfers  on a daily basis until the full amount advanced plus the factor rate has been reached
  • MCAs can make funds available as quickly as the next business day
  • The application process is fast and simple

How a Merchant Cash Advance Provider Analyzes Your Business

An MCA provider does not place significant emphasis on your time in business, credit history or credit scores when they decide to advance you money. Instead, they will look at the historical and projected revenue of your business — especially funds collected by debit, credit or charge cards. An MCA provider will expect:

  • An acceptable daily balance of funds in your bank account
  • A less than 10 not sufficient funds (check bounces) a month
  • At least one year of business history
  • More than 10 deposits a month from unrelated customers

The Three Most Vital Components for a Merchant Cash Advance

There are four main components to a merchant cash advance:

The funding amount: How much is advanced to your business

The total payback amount: The amount advanced plus the factor rate

The term length: The number of days until the advance is paid back

Factor rate

One of the most important areas is the factor rate, so let’s explore that in more detail.

How the Factor Rate Works

A factor rate represents the discount taken by the MCA provider buying your future revenue. Because MCAs are advances of future revenues — and not loans — no interest is involved.

The rate varies but generally falls somewhere between 1.1 and 1.5. The MCA provider will determine your specific rate based on a number of variables, including consistent monthly revenue, no negative balance days, and other debt obligations. For example, if the MCA provider advances you $10,000 with a 1.2 factor rate, you will be expected to ACH $12,000 over the agreed purchase period. The faster you agree to remit the purchased receivables , the lower your factor will be.

What to Expect When You Work With a Merchant Cash Advance Provider

An MCA provider, also known as a “funder” will need to know what your business does, its history, revenue, and how much capital you’re looking for. They will then determine how much they are able to advance your business, the daily ACH amount, factor rate and term length.

Here’s how this might look in practice.

Total advance
$10,000$20,000
Factor rate
1.251.2
Purchased receivables amount
$12,500$24,000
Average daily sales
$800$1,500
Amount sent to MCA provider
15%20%
Daily ACH
$120$130
Term Length (Days)
10480

Steps to Obtain a Merchant Cash Advance

Here’s what is typically involved in the application and approval process:

  1. You will complete an online form
  2. A funding advisor will reach out to you to discuss what financing options make the most sense for your business and situation
  3. Supporting documents including a driver’s license and bank statements will be requested for underwriting purposes
  4. Once the MCA provider has reviewed your file, you will learn whether or not you are approved for the advance and how much capital you are approved for
  5. After you have agreed and signed, your funds  will be deposited into your business bank account – many times the very next business day
  6. You will authorize your bank to transfer by ACH the estimated daily amount purchased to the funder.

It’s vital to have all the supporting documents and bank information you need as soon as you begin the MCA application process. This will speed up approvals so you are able to receive a funding decision more quickly.

How to Tell if a Merchant Cash Advance
Is Right for Your Business

If the following points apply to your business, then a merchant cash advance might be perfect to meet your growing capital needs:

  • You need funds in a week or less
  • You’re prepared to provide a portion of your revenues for the next few months until your advance has been fully paid off
  • You have a short business history
  • You have a low personal or business credit score
  • You do not want to provide collateral for funding
  • You do not want to go through a lengthy and detailed application process
  • You cannot access a traditional business loan or financing
  • You intend to structure  your advance for short term funds (typically between three months and a year)
  • You understand that the factor rate will typically be higher than the interest rate on a traditional loan
  • You can show three month’s worth of business revenue and transactions

You understand the terms of the MCA, the use of automated payments by ACH from your account to the  MCA provider and the factor rate which is the cost of

 

If a Merchant Cash Advance is Right for Your Business, We Can Help

We’re experts in analyzing your business and providing competitively-priced MCAs. If you need funding quickly, we’re here to help. Our application process is fast and simple, and we can have the money to your bank account in less than a week. Apply now.

Read More About Business Loans

Capital One Small Business Banking Review for 2019

When it comes to financial solutions for your small business, finding the right banking partner can be a challenge. As a key player in the mobile and online banking industry, Capital One is a partner worth consideration. We’ve dug a bit deeper and actually used a Capital One bank account. Here’s what we found out: […]

PayPal Business Debit Card + Overdraft

The PayPal Business Debit MasterCard can be a convenient way for businesses that use PayPal to access the funds in their PayPal account. It’s important to know exactly how this card works — including overdraft features — to determine if it’s a good choice for your business and to use it correctly.