About Merchant Cash Advances
A Merchant Cash Advance (MCA) is a financing option for businesses in need of quick access to capital who for some reason may not meet the credit requirements of a traditional unsecured loan. Rather than being approved based on the typical creditworthiness, business are scored on other factors including average credit card payments processed. When obtaining a Merchant Cash Advance, borrowers will receive a lump sum of cash and the payback will be a fixed percentage pulled directly from the credit card payments the business collects from clients.
It’s important to note that a Merchant Cash Advance is not a loan. You are receiving an advance on your future credit card receivables in exchange for a share of those future receivables. For example, say you own a coffee shop and your old espresso machine just frothed it’s last double-latte non-fat skim cappuccino. You need $10,000 to buy a new machine but do not have the cash and would not qualify for a traditional loan. Most of your clients pay you by credit and debit cards. You can get an advance on what you expect clients to pay you in credit card payments over the next few months.
A Merchant Cash Advance can act as a lifeline for businesses who need to put out a financial brush fire by covering an unforeseen expense i.e. equipment repairs. They are also a great option for any business that experiences seasonal swings since the payback is based on the businesses sales revenue that day.
How Does It Work?
Since it is not a loan traditional APR rates do not apply. Instead, Merchant Cash Advance fees calculated using “factor rates.” The factor rate will be the number the amount borrowed is multiplied against to calculate what the total payback will be. Using our espresso machine example, if a company receives an advance of $10,000 with a factor rate of 1.2, the total payback will be $12,000 ($10,000 x 1.2).
Once the company receives the advance, the lender will begin withholding a portion of each day’s credit card payments. These amounts are based on the holdback percentage the business is approved for and can range from 8% to 30%. For example, a business with a holdback percentage of 10% has credit card receipts of $1,000. That day the lender would holdback $100 ($1,000 x 10%) and apply it to the payback of the Merchant Cash Advance.
Benefits of a Merchant Cash Advance
Accessibility – Merchant Cash Advances are easier to obtain and qualify for than unsecured business loan options.
Collateral – Typically Merchant Cash Advances do not require any additional collateral.
Flexibility – Since the company has the ability to spend the funds wherever they are most needed, Merchant Cash Advances are very flexible.
Speed – Merchant Cash Advances are built on speed – borrowers can sometimes have funds in their account same day.
Drawbacks to a Merchant Cash Advance
Rates – Since Merchant Cash Advances do not require collateral, they will often have higher rates than most business loans.
Term – Merchant Cash Advances are meant to be paid back quickly, usually within 3-9 months.
Inconsistency – Some Merchant Cash Advances have fluctuating daily payments depending on your credit card receipts or deposits that day.
Requirements for Obtaining a Merchant Cash Advance
A history of collecting credit card payments of at least six months – the amount you are approved for will be based on how much your clients typically pay you by credit card on a monthly basis.
At least $50,000 in annual credit card receipts – again, this can vary but keep in mind the amount you will be approved for will be directly related to your business’ credit card volume.
Personal credit score above 500 – Merchant Cash Advance providers are much more lenient on the personal credit side, but they do have limits.