Merchant Cash Advance: Is It Right For Small Business?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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A merchant cash advance can be a viable funding source if you need capital but can’t get approved for a business loan or line of credit. Most lenders offer rapid approvals and funding options. Here’s a breakdown of how they work, some of the benefits they offer, and guidance on where to find a merchant cash advance that fits your company’s needs. 

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is an alternative to a traditional business loan or line of credit that lets you borrow against future sales. Depending on the term of the agreement, you’ll repay what you borrow through one of these methods: 

  • The lender automatically withdraws a percentage of debit or credit card sales over a three to 36-month period.
  • The lender automatically withdraws a portion of your total daily sales. 
  • The lender initiates daily or weekly ACH payments for the same amount from your business checking account.

There’s also a factor fee to consider, anywhere from 1 to 1.8. The more stable your business is, the lower the factor rate. So, if you qualify for a merchant cash advance of $12,000 with a factor rate of 1.7, you’ll pay an additional $8,400 in fees. However, if your company’s financial health is stellar, you could get a factor rate of 1.1 and only pay $1,200 in fees. 

Is a Merchant Cash Advance a Loan?

Although you’re technically borrowing funds from a lender, a merchant cash advance is considered an alternative form of financing. In this way, it’s not exactly a loan, but an advance on your business’s revenue.

What To Expect From A Merchant Cash Advance

Advance Amount

The lender will approve you for a certain amount and send the funds to your bank account.

Payback Amount

You’ll repay the advance amount and the factor fees, which are generally on the high end and determined by your company’s revenue volume. If you have a healthy amount of sales, you could qualify for a lower factor rate. 

Holdback

The holdback percentage is the amount of sales the lender withdraws daily or weekly to recoup what’s owed. It generally ranges between 10 and 20 percent. So, if your holdback rate is 17 percent and you collect $1,000 in credit and debit card payments on a particular day, the lender will collect $170.

Pros of A Merchant Cash Advance

Fast Access to Cash

Business applicants get a lending decision relatively quickly, and you typically don’t have to provide a load of paperwork to the underwriter. 

Flexible Repayment Terms

Assuming your payments are determined by sales volume, a drop in operations won’t destroy your company’s financial health. Instead, the lender will simply deduct a lower amount from your bank account. 

Can Be Paid off Quickly

Depending on how much you borrow and your sales volume, you can pay off a merchant cash advance far quicker than you would a traditional business loan. 

Strong Credit Not Required 

If your credit score isn’t the best, you could still get approved for a merchant cash advance. In fact, this form of financing is a preferred option for business owners who need capital but can’t get approved for a traditional business loan or line of credit elsewhere. 

No Collateral Required

You won’t have to put your assets at risk to qualify for a merchant cash advance. You also won’t have to risk losing them if you’re unable to pay what you borrow. 

What Can You Use a Merchant Cash Advance For? 

Improve Cash Flow

Cash flow issues are bound to arise in most businesses. You won’t have to scale back or shut down operations if you secure a merchant cash advance to get over the financial hump. 

Purchase Inventory

Suppliers often provide deep discounts to small business owners who buy inventory in bulk. If you don’t have the cash on hand, you can use a merchant cash advance to take advantage of the cost savings. 

Power Through Busy Seasons

If your customers demand more inventory than you can afford to cover during busy seasons, a merchant cash flow can help prevent shortages. 

Manage Emergencies

Unexpected expenses are bound to surface at some point in your business. But a merchant cash advance is a better option than depleting your cash reserves to effectively manage the emergency. 

Seize New Opportunities

Instead of turning down lucrative business opportunities because you don’t have the funds on hand, consider a merchant cash advance to keep your business moving forward and in the right direction. 

How to Qualify for a Merchant Cash Advance

Eligibility criteria vary by lender. However, you should generally have at least six months in business and at least $10,000 in monthly credit and debit card sales to qualify. Some lenders will also evaluate your creditworthiness, but a low credit score won’t necessarily make you ineligible for a merchant cash advance.

Where Can You Get a Merchant Cash Advance for Your Business? 

Several companies offer merchant cash advances, but not all are a good fit for your business. But with a Performance Advance™ from National Business Capital, you can get the funds you need to fill cash flow gaps, cover unexpected expenses, foster business growth, or capitalize on new opportunities. All you need is three months of business experience and a minimum of $10,000 in annual revenue. 

There are no collateral requirements or personal guarantees, and you can qualify in minutes even if you have less than perfect credit. Best of all, you could get funding in as little as 24 hours.

Complete an online application today to get started. It takes 60 seconds, and if there’s a match, National Business Capital will present you with personalized financing offers from its network of over 75 lenders.

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