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Merchant Cash Advance: Is It Right for Your Business?

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated April 8, 2024​

6 min. read​

If you’re seeking quick access to cash for your small business, a merchant cash advance (MCA) might be your perfect solution. MCAs are a great alternative to traditional loans because of their short approval processes, no collateral needed, and lenient credit requirements.

A merchant cash advance isn’t a loan. Instead, it’s a funding solution that business owners can borrow and pay back using a percentage of their future debit and credit card sales. When you apply for a merchant cash advance, the lender will look at your credit card receipts to evaluate your eligibility to repay the advance amount based on your daily credit card sales or debit card sales.

As with any other funding solution, merchant cash advances have advantages and disadvantages. Therefore, it’s wise to weigh the pros and cons of using one to determine if it’s the right option for your business needs.

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Should You Get a Merchant Cash Advance for Your Business?

The decision to get a merchant cash advance entirely depends on your business’s current financial situation. If you need fast access to working capital to manage your cash flow shortages or cover any other short-term business expense, an MCA might be the solution to your problems.

Merchant cash advances are generally a great funding solution for business owners with credit card transactions. This is because you’ll use your future credit card sales to pay back the borrowed money. They’re also ideal for businesses seeking short-term financing and who don’t have enough assets to serve as collateral.

MCAs are also an ideal option for businesses with less-than-perfect credit. While credit score requirements vary by lender, most merchant cash advance companies are more interested in your credit card transactions.

Pros of Merchant Advance

A merchant cash advance comes with several benefits, including:

Fast Access to Cash

One major benefit of using MCAs is the quick access to funding. Unlike traditional bank loans, which have lengthy approval processes that may take weeks to complete, it takes as little as a few hours or a couple of days to receive an MCA, depending on the lender. Most lenders will only look at your credit card receipts to determine your capability to repay the funds.

If you have a short-term project or an unexpected business expense, a merchant cash advance can be an excellent financing option for your needs.

Flexible Requirements and Repayment

Merchant cash advances don’t have the rigorous eligibility requirements of traditional loans. All you need is enough credit card receipts to pay back the borrowed funds.

Additionally, MCAs have flexible repayment schedules. For instance, you can adjust your holdback period if you’re going through a slow sales period. You also don’t need collateral to back up the lump sum amount of money you borrow.

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Doesn’t Need a High Credit Score

Merchant cash advance companies are also willing to work with small business owners with low credit scores. What matters most is credit card sales. Since the lender takes a percentage of sales, you need to assure the lender that you have enough daily credit card sales or monthly credit card sales.

No Collateral Required

Most business financing options require collateral, typically an asset that the lender can seize and sell when you default on your loan payments. However, with a merchant cash advance, you don’t need collateral to back up your financing.

Cons of Merchant Advance

Like any other business financing option, merchant cash advances have drawbacks, too.

Expensive (High APR)

Merchant cash advances (MCAs) are typically expensive compared to other business loans. The annual percentage rate (APR) for MCAs can go up to 200%, depending on the lender, the size of the cash advance, fees, and the repayment period. Additionally, it’s difficult to determine when you can pay off the advance in full due to factor rates.

May Hurt Cash Flow

Taking out an MCA may hurt your business cash flow, depending on how you agree to repay the advance. For example, if you opt for a fixed payment schedule, a set amount of money will move out of your bank account daily, weekly, or monthly. In slower sales periods, you may experience cash flow shortages, which may halt operations.

Doesn’t Help Build Credit (Some Can Make It Worse)

While some business loans help build or rebuild credit, merchant cash advances don’t. Since MCAs are not loans, lenders do not report payments to credit reporting agencies, so they won’t help you build credit. Startups and small businesses looking to build credit may want to consider other types of business financing.

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Higher Sales Also Means Faster Payback

One significant aspect MCA providers look at when evaluating the eligibility for a cash advance is credit card sales. If your sales go up, you can pay off your advance early. Paying it off early comes with trade-offs, though, such as increased APRs.

No Savings If You Pre-pay

Unlike traditional amortized loans, which may help you save on interest if you pay off your loan early, there’s no benefit to repaying your MCAs early. In fact, you may be penalized for paying back the advance ahead of schedule since your APR increases.

MCA Contracts are Complex

Merchant cash advance contracts can be complicated, especially when it comes to payments. Their factor rates and repayment schedules are based on a percentage of sales, which can be confusing.

Plus, most merchant cash advance providers do not include APRs in their agreements. This makes it even more challenging since borrowers can’t compare MCAs with other business financing options.

Alternatives to Merchant Cash Advance

Before committing to a merchant cash advance (MCA), it’s always wise to seek out alternative forms of business financing. If you don’t qualify for an MCA or it doesn’t appeal to you in one way or another, here are some options to consider.

Revenue Based Financing

This financing method offers a lump sum and has flexible monthly payments. Lenders will request a percentage of your company’s gross revenue for the month. This percentage stays the same, which means you will have lower monthly payments during your company’s slower seasons. E-commerce store owners can more easily withstand a product losing demand since the monthly loan payments aren’t fixed. You will end up with higher monthly payments if your gross revenue goes up each month.

Stenn provides an innovative revenue-based financing solution for businesses seeking working capital. With a proven history of delivering over $20 Billion in financing based on revenue generated by businesses, Stenn understands the unique financial challenges modern businesses face. Their experienced team is dedicated to helping businesses thrive and achieve their financial goals through flexible financing solutions. Fill out this simple form to explore Stenn’s revenue-based financing option with no obligation.

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Revolving Line of Credit

A revolving line of credit is a type of loan that allows you to borrow money repeatedly up to a certain credit limit. Once your credit limit is reached and you have paid off your balance in full, you can borrow again. The good thing about a revolving line of credit is that you only pay interest on what you borrow.

Business Credit Card

Business credit cards are tailored for businesses rather than individuals’ personal use. They are available to all businesses regardless of size or industry. Like personal credit cards, they can help business owners build credit. One major drawback of business credit cards is that they have higher interest rates than traditional loans.

Invoice Financing

Invoice financing is a short-term form of financing that businesses can borrow against the amount of due invoices issued to customers. The invoice themselves serves as collateral for the amount you borrow; thus, it is often easier to qualify for invoice financing. You don’t need a good credit score to qualify for invoice financing, but it is still your responsibility to collect payments. Invoice factoring companies are different entities that handle invoice collections for you. However, those companies also communicate with your customers; not every business owner wants to give that up.

Term Loan

A business term loan allows you to get a lump sum of money and repay the principal plus interest over a set period of time. Term loans are typically ideal for businesses seeking financing to cover short-term expenses, such as purchasing equipment or any other asset to keep the business going.

Working Capital Loan

A working capital loan is a short-term loan used by businesses to finance everyday operations. It can be used to pay rent, cover payroll, fill cash flow gaps, and cover any other business expense.

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Determining if Merchant Cash Advance Is Right for You

MCA lenders are useful funding options for business owners with bad credit. These factors can help you determine if this type of financing makes sense for you.

Evaluating Your Business’s Financial Health

Business owners should assess if they need financing and how they can repay the debt. Some financing companies offer U.S. Small Business Administration loans with competitive rates, but some e-commerce merchants can’t keep up with the first monthly payments. Merchant cash advances have more generous repayment terms since they are based on a fixed percentage of your credit card sales.

Some companies can afford monthly small business loan payments and would rather have more predictability. Business owners should assess what they can afford and what repayment plan works for them.

Considering Your Business’s Cash Flow

Traditional business loans take up more space in your company’s budget. These loans are typically more affordable, but you don’t want to squeeze your company’s cash flow. MCA lenders cater to business owners with tight profit margins and don’t want a high monthly expense after receiving a lump-sum payment.

Assessing Lender Criteria and Eligibility

A high personal credit score can give you access to more loan options. If your score isn’t the best, you can still get financing. Many online lenders work with small business owners who have low credit. A merchant cash advance is a relatively good option for people with low credit scores who need some type of financing.

Conclusion: Weighing Out the Pros and Cons of Merchant Cash Advances

Merchant cash advances are more expensive than most business loans. You will end up with higher rates and additional fees if you use this option. However, it’s the only choice for some businesses since this financial product has lower credit score requirements than traditional loans. You also make lower monthly payments that fluctuate based on your company’s credit card transactions.

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FAQs About Merchant Cash Advance

What is the difference between a loan and a merchant cash advance?

A loan has fixed monthly payments; each on-time payment helps your credit score. Merchant cash advances do not have fixed monthly payments and depend on your company’s credit card transactions. MCAs have lower credit score requirements and are more expensive.

How does the repayment process work for a merchant cash advance?

You have to repay a percentage of credit and debit card transactions. This amount is known as a holdback, and it can range from 10% to 20% of sales. The amount you pay depends on how much revenue your company generates from credit and debit card transactions.

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