What is a Merchant Cash Advance?

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

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

What Is A Merchant Cash Advance?

A merchant cash advance is a form of financing that lets you borrow against future sales. It’s 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. You’ll generally have two ways to repay what you borrow: 

  • Option 1: The lender 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 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 benefits to MCAs that are worth considering: 

Fast Cash Access

Unlike traditional business loans, the underwriting and approval process for merchant cash advances is fast. 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. 

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. 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, this form of financing also has its share of disadvantages: 

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 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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How To Get a Merchant Cash Advance

  • 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. (Most lenders only want proof of sales volume for the last four to six months).
  • Step 3: Submit a formal application and await a response from the lender.

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.

Are Merchant Cash Advances Bad?

Merchant cash advances have benefits and drawbacks. 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 through a direct lender, like LoanMe, which offers financing options to business owners with bad credit.

Are Merchant Cash Advances Legal?

Yes. Merchant cash advances are regulated by the Uniform Commercial Code in your respective state.

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.

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