What is a Merchant Cash Advance?

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

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Is your business in a slump? A merchant cash advance or MCA could be an option if you need cash fast but worry that you won’t get approved for a small business loan. They’re easier to get approved for, and you could get cash quickly. 

Contrary to popular belief, an MCA is not a loan. Instead, it is a form of financing that lets you borrow against future sales and serves as a viable alternative to a loan for business owners experiencing temporary cash flow issues. 

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How Merchant Cash Advances Work

If you’re approved for an MCA, funds are deposited into your business bank account in a lump-sum payment. You’ll generally have two ways to repay what you borrow: 

  • Option 1: The MCA provider will take a percentage of each debit or credit card transaction that hits your account over a three to 36-month period. Some lenders opt to withdraw a portion of total daily sales from debit card or credit card transactions instead.
  • Option 2: The lender will initiate daily or weekly payments from your bank account. Payments can be made through ACH (Automated Clearing House) for a set amount per the financing agreement you sign at the time of approval.

Merchant cash advance providers also charge a factor fee. The factor rate, usually between 1.0 and 1.8, is determined by the level of risk your business poses to the lender and the repayment period. To illustrate, if you’re approved for $15,000 with a factoring rate of 1.6, you’ll pay $9,000 in fees. But if your company’s credit health is exceptional and you receive a rate of 1.2, the total fees paid will drop down to $3,000. 

Merchant Cash Advance Pros

There are some key advantages of MCAs that are worth considering: 

Fast Access to Cash

Unlike traditional business loans, the underwriting and approval process for merchant cash advances is fast. There’s no lengthy approval process. You won’t have to provide a load of paperwork when you apply and could receive an answer from the lender within a few hours. Some lenders also offer rapid funding options to get your business goals up and running again. 

No Usage Restrictions

Most lenders allow you to use the funds however you see fit in your business. It’s in your best interest, though, to refrain from using a merchant cash advance for personal reasons. 

Can Qualify With a Lower Credit Score

Many small business owners with credit challenges turn to this form of funding to get over a rough patch. They’re one of a few business funding options that don’t require you to have good or excellent credit to get approved. 

Flexible Terms

If your payments are based on sales volume, a temporary decline in sales won’t automatically implode your company’s financial health. Instead, the lender will reduce the amount that’s deducted from your bank account. 

No Collateral Required

Merchant cash advances are an unsecured form of financing, which means you don’t have to put up collateral to get approved. Consequently, your company’s assets won’t be at risk if you cannot make payments and default on the agreement. 

Merchant Cash Advance Cons

Unfortunately, there are also cons of a merchant cash advance to keep in mind: 

Very Expensive

A merchant cash advance can be an expensive form of financing. This is especially true if you get a large amount of cash and a steep factoring rate. For example, if your business gets $100,000 with a factoring rate of 1.8, you’ll be on the hook for a whopping $80,000 in fees.

Payments Become a Cash Flow Burden

The factoring rate can make the payments overwhelming after some time. In fact, you could do the math and find that it’s equivalent to a triple-digit APR (Annual Percentage Rate) on a traditional loan product. And the more you earn, the higher the factoring rate could increase if the merchant cash advance provider factors in the repayment timeline when deciding how much in fees you’ll pay. 

No Benefit For Early Prepayment

You can save a lot of money in interest if you get a business loan and pay it off early, assuming there’s no prepayment penalty. This is because you would not have to pay interest in those remaining months. However, that’s not the case with merchant cash advances. The fees are built-in, so there’s no incentive to repay the outstanding balance early.

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Does a Merchant Cash Advance Make Sense for Your Business?

A merchant cash advance is a flexible source of funding that could be a good option in many instances. For example, if you have a short-term need or cash flow issue that will be rectified in the coming weeks or months as peak season approaches, you can use a merchant cash advance to access the working capital needed to keep operations running smoothly and avoid having to shut the doors to your business. 

This source of business financing can also be useful if you encounter an unexpected business expense that will deplete your company’s reserve or if you’re on the brink of defaulting on high-interest debt. Another instance where a merchant cash advance could be beneficial is if you’re looking to acquire inventory in bulk, pay for supplies in advance, or both to take advantage of a discount being offered by the merchant. 

Still, there are instances where a merchant cash advance may not be a smart financial move. The most notable case is when your financial profile makes you eligible for less costly forms of business funding. 

How To Get a Merchant Cash Advance

The three-step process listed below takes the guesswork out of getting a merchant cash advance for your business: 

  • Step 1: Find a reputable merchant cash advance provider. Be sure to research several options before deciding where to apply.
  • Step 2: Gather the documents needed to process your application. 
  • Step 3: Submit a formal application and await a response from the lender.

When you’re ready to apply for a merchant cash advance, consider ROK Financial to streamline the lending process. You could be eligible for funding if you’ve been in business for at least months and earn $5,000 or more in gross monthly sales. Even better, there are no minimum credit score requirements, so a lower credit score doesn’t necessarily mean lenders will turn you down. 

Visit the website today and submit an online inquiry to learn more about its offerings and other financing opportunities that may be a good fit for your business. Upon receipt of your submission, a Business Financing Advisor from ROK Financial’s team will reach out to discuss your capital needs and identify funding options that are a good fit. 

Frequently Asked Questions

Below are some frequently asked questions regarding merchant cash advances. 

Can You Get a Merchant Cash Advance With Bad Credit?

Yes, you can get a merchant cash advance with bad credit. This financing option is usually a top choice for business owners with past credit challenges, but you’ll likely undergo a credit check as a part of the application process.

Is It Hard to Get a Merchant Cash Advance?

This varies by lender since each has its unique eligibility requirements. However, many lenders make merchant cash advances more easily accessible to small business owners since there is usually no minimum FICO score requirement. Individual lenders may still have some specific requirements for minimum monthly revenue or time in business to be considered for funding.

Are Merchant Cash Advances Bad?

Merchant cash advances have benefits and drawbacks. For example, they offer fast cash to smooth out income gaps and cash flow issues. Still, the cost of taking it out could greatly outweigh the benefits, depending on the factoring rate you receive. And it could be more sensible to apply for a small business loan which may have better terms.

Are Merchant Cash Advances Legal?

Yes. Merchant cash advances are regulated by the Uniform Commercial Code in your respective state. However, these debt products are not federally regulated, which sometimes leads to predatory lending tactics imposed on consumers by deceptive lenders.

Can You Get Out of a Merchant Cash Advance?

If you take out a merchant cash advance only to find that it’s too overwhelming, you may not be completely out of luck. Depending on your credit profile, you may be able to refinance it using a loan product with lower borrowing costs. However, be mindful that this can be difficult if you have a lower credit score, as many lenders offering small business loans prefer borrowers with solid credit ratings.

Can a Merchant Cash Advance Hurt Your Credit?

Most lenders don’t report payment activity on merchant cash advances, so they won’t help improve your business credit score. However, if the merchant cash advance company requires a personal guarantee and you default on the monthly payments, there could be serious consequences for your personal credit score.

What Happens If You Don’t Repay the Merchant Cash Advance?

This form of financing isn’t secured, so you won’t automatically lose your company’s assets. However, you could get sued in court by the lender. If the merchant cash advance provider wins a judgment against you, they could seize your personal or business assets.

Are Merchant Cash Advances and Small Business Loans the Same?

Like traditional bank loans offered to small business owners, you must repay the advance to the lender. But there are some key differences between the two. With merchant cash advances, the monthly payments are usually determined by your debit card or credit card sales volume, making this amount more manageable given your company’s financial status. On the other hand, a business loan’s monthly payments depend on the interest rate and loan term (or repayment terms) you receive. In addition, this amount is set in stone before the loan proceeds are disbursed (assuming you receive a fixed-rate interest loan), and there’s no way to adjust the monthly payment at a later date unless you refinance the loan.
Some small business owners lean towards small business loans as they tend to have far lower borrowing costs. But if your company’s earnings are volatile, a fixed monthly payment could mean bad news if you hit a rough patch, sales steeply decline, and the business cannot afford to repay the loan.
Even worse, your personal credit score could be negatively affected if the small business loan requires a personal guarantee. Unfortunately, this also means you’ll be held personally liable for the company’s debt.

Are There Viable Alternatives to a Merchant Cash Advance?

Yes, and many of them have more attractive financing terms, including better interest rates. You can explore other options through ROK Financial to determine if another form of funding is a better fit. Alternatives include a traditional small business loan, a small business line of credit, a business term loan, accounts receivable financing, equipment financing, an asset-based loan, franchise financing, startup funding or an SBA loan.

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