What Is a Merchant Cash Advance and How Does It Work?

A merchant cash advance (MCA) is a sort of business financing in which a corporation lends you money in exchange for a percentage of your daily credit and debit card sales, plus a fee. A merchant cash advance isn't technically a loan; rather, it's you selling your future debit and credit card transactions at a discount.

Merchant cash advances are often reimbursed on a daily or weekly basis, and the finance business deducts the amount from your payment processor automatically. Repayments are based on your sales in this way—if sales are poor, your payments will be lower as well, but it will take you longer to repay the advance.

How Does a Merchant Cash Advance Work?

Traditionally, merchant cash advances work like this:

A MCA financing company provides you with a lump sum of cash.You repay that funding, plus fees, as a percentage of your daily (or weekly) debit and credit card sales.Payments are withdrawn automatically from your merchant account until you’ve repaid the full amount, again, plus fees.

Unlike most other types of business loans, merchant cash advances do not have set annual percentage rates or repayment terms.

 

Merchant Cash Advances are often used by businesses that rely on debit and credit card sales for revenue - restaurants, bars, retail stores, salons. Some finance organizations will take payments directly from your bank account, as opposed to a merchant account. This can be beneficial for businesses who don't rely primarily on debit or credit card sales. The method is almost the same in this situation. 

Merchant cash advances are a convenient way to get quick funding for your business. MCA providers can connect to your bank account or merchant service provider.

Is a Merchant Cash Advance Right for Your Business?

The reality for many small business owners is you will face an occasional shortage of much-needed working capital. If you’ve saved for a rainy day, you won’t have to borrow. Even if you’ve saved for a rainy day, you may want to borrow instead of liquidating an asset or draining your savings.

Deciding whether or not a merchant cash advance is right for your business will be easier if you consider your specific needs and limitations. If you answer yes to any one of the following questions, a merchant cash advance might be worth considering.

Do You Receive Payment for Most of Your Sales With Credit/Debit Cards?

Most merchant cash advance lenders require a minimum of $5,000 in monthly credit/debit card sales to qualify for an advance.

Do Your Sales Fluctuate Seasonally?

If your sales are seasonal, the cash it takes to ramp up for the season can make or break your success. And the time between seasons can be tight making a fixed monthly payment difficult.

Do You Need Fast Access to Funds?

One of the biggest advantages of a merchant cash advance is the quick access to a lump sum of cash.

Do You Sell Exclusively Online?

This type of retailer has always been a tough business model for traditional banks to serve. Most banks want to secure a loan with fixed business and personal assets (i.e., equipment, machinery, real estate). As a small virtual retailer, you likely have no fixed business assets to use as collateral.

Do You Have a Low Credit Score?

If your credit score is too low for a bank loan or if you don’t want to add any more debt to your credit report, a merchant cash advance may be a solution for you.

Do You Want to Spend the Funds On Anything You Want?

You need more labor for high season, more inventory, marketing campaigns, or other short-term working capital. The reason you need cash does not factor into the MCA approval process.