What is a Merchant Cash Advance?

What is an MCA?

An MCA is an alternative financing method in which a business receives a lump-sum payment in exchange for a specific percentage of its future credit and debit card sales. If your business accepts credit cards, an MCA can help you cover temporary cash flow problems with future sales. 

An MCA can be a good option for businesses that process a high volume of credit card transactions and need fast access to cash. However, an MCA won’t be an option if your business doesn’t accept credit card transactions.

How does an MCA work?

Here’s how a merchant account works: 

1. You apply for an MCA with a lender: Applying for and receiving an MCA is relatively quick. The amount you’re approved for will depend on your daily credit card transaction volume. (More on choosing a lender below.)
2. You receive your funds: You could receive anywhere from a few thousand dollars to over $200,000 and you might be able to access the funds in a few days. During this time, you can use the funds for practically anything — MCA contracts don’t restrict your spending categories like some other loans, including Small Business Administration (SBA) loans. That said, most small businesses use MCA funds as working capital or to bolster cash flow.
3. You repay your MCA: Your lender will take a percentage of your daily credit card transactions until funds are repaid. This percentage is known as the holdback rate and it usually ranges from 10 percent to 20 percent. Most lenders deduct these funds automatically from your merchant account or bank account. The repayment terms are based on a percentage of your daily sales, so you won’t be in a financial bind if your business suddenly slows down. Note that MCA repayment terms typically are short, often less than 18 months.

What costs are involved in an MCA?

MCA costs depend on the amount you receive and your factor rate, which ranges from 1.1 to 1.5. Your business’s financial strength determines your factor rate and a better credit score translates to a lower factor rate. 

For example, say you receive an MCA for $100,000 and your factor rate is 1.2. That means you’ll owe $120,000 in total. 

When should you use an MCA?

Although MCAs don’t have the best reputation, there are times when taking out one could be the right choice for your business. For instance, they can be a good option for businesses that need fast access to cash but don’t qualify for a bank loan.

Even if you qualify for a loan, you may need immediate access to funds. MCAs are processed much faster than small business loans and have minimal paperwork. 

Overall, MCAs are a good option for businesses that need fast funding to cover short-term expenses. If you run a seasonal business, need to address temporary cash flow issues or must pay for a one-time business expense, an MCA can help.

What do you need to get an MCA?

It’s easy to qualify for an MCA because, unlike small business loans, you don’t have to show years of business history. You often don’t even need an excellent credit history to qualify.

Here’s what you need to do to get an MCA.

• A lender that offers MCAs: Traditional banks don’t typically offer MCAs, so you’ll need to find an alternative lender. Lending marketplaces are a good place to look because you can fill out a single application and compare offers from multiple lenders. 
• Sales history: After you find a lender, you must show at least six months of credit card transactions. A history of good sales can make it easier for small business owners with bad credit to qualify. 
• Administrative information: You’ll fill out the application with your lender and provide the following information:
  • Proof of identity
  • Contact information
  • The amount you want to borrow
  • Company information
  • Bank and credit card processing statements
  • Business tax returns

Here are a few best practices to keep in mind when applying for an MCA.

• Find a lender you trust: A reputable lender makes all the difference when it comes to your MCA experience. Consider multiple lenders; when you find a few you like, check their Better Business Bureau rating to see what experiences other customers have had. 
• Calculate precisely how much you’ll owe: Once you know your factor rate, calculate the total cost of what you’ll end up owing. The holdback rate can help you determine how much you can expect to repay daily. Knowing these figures can help you decide whether an MCA is worthwhile.
• Ask for an early repayment incentive: If you repay your MCA early, you’ll raise your annual percentage rate (APR). Ask your lender if it will lower the flat fee if you pay off your cash advance early. 

Pros and cons of MCAs 

MCAs have distinct advantages and disadvantages that you should be aware of before accepting a loan.

Pros

• MCAs have a fast application and approval process: MCAs are easy to apply for and the approval process is quick. Unlike small business loans, MCA paperwork is minimal and you can receive the funds within a few days. 
• MCAs are viable alternatives to small business loans: Some businesses don’t have the credit history or experience to qualify for a small business loan. MCAs are a good alternative — if you can show a high volume of credit card transactions. 
• MCAs can be used for anything: When you take out an MCA, there are no requirements for how you can spend the cash. You can use the funds however you feel they would be the most useful. 
• MCAs don’t require collateral: Other than committing to a percentage of your future credit card payments, there are no business collateral requirements because an MCA is an unsecured loan.

Cons

• MCAs are very expensive: MCAs can be incredibly expensive, especially if you receive a high factor rate. But even with a low factor rate, you could end up with an APR as high as 35 percent. 
• MCAs are not federally regulated: MCAs are regulated by the Uniform Commercial Code in your state. Since they aren’t federally regulated, they aren’t subject to laws like the Truth in Lending Act, which protects consumers from unfair lending practices. As a result, many business owners find MCAs overly complex and difficult to understand. 
• MCAs won’t help you build business credit: Your lender won’t report on-time payments to the major credit bureaus, so an MCA won’t build your business credit. The advantage is that it can’t hurt your credit, either.
• MCAs can cause more cash flow problems: While an MCA provides short-term relief, it can cause more cash flow problems over time. The mandatory daily payments can become a burden and trap your business in a cycle of debt. 

The best MCA providers

Two of our picks for the best business lenders that offer MCAs:

• Businessloans.com: This online marketplace educates you about the types of financial products available through its lending partners, including MCAs. You’ll fill out a short questionnaire and then Businessloans.com will connect you with lenders that suit your needs. Learn more about why this platform is a great choice for comparing MCA offers via our Businessloans.com review.
• Rapid Finance: MCAs from Rapid Finance range in size from $5,000 to $500,000. This lender’s MCA application takes just a few minutes and you can take three to 18 months to complete your loan. Notably, Rapid Finance uses “complete” instead of “repay” — this lender lacks fixed payment terms and instead estimates a funding period based on your receivables. Explore this lender’s offerings via our Rapid Finance review.

MCAs: Making the right decision

If you’re considering an MCA, proceed with caution. It can help relieve temporary cash flow issues, but you’ll pay incredibly high rates for the convenience.

If you aren’t careful, an MCA could cause more cash flow problems over the long run. Some borrowers find that after receiving an MCA, they soon need another cash advance. This fast cash can trap you in an ongoing cycle of debt. Consider getting offers for other types of loans before committing to an MCA and only sign on the dotted line if you’re sure it’s right.

Max Freedman contributed to this article.