Merchant Cash Advance: Should you consider one?
Updated: May 30
Merchant Cash Advance
It can be tough starting a small business. If you have bad credit or outstanding invoices, how do you create a business that generates the income you need to pay off your debts?
If small business loans and other types of business credit are out of your reach, one alternative method of financing is a merchant cash advance (MCA).
With an MCA, your business gets cash upfront in exchange for a portion of your future sales.
Merchant cash advances promise a quick infusion of cash into your business.
An MCA could also help you stay afloat in troubled times, but there are downsides to getting fast money. In this article, LoanGuru will explain this method of financing.
How does a merchant cash advance work?
A merchant cash advance is a sum of money the provider gives you upfront. In return, the provider gets a predetermined amount of your future earnings.
Is a merchant cash advance a loan?
Technically speaking, a merchant cash advance is not a loan.
With loans, the bank lends you money, and you make regular repayments on the principal, along with interest.
With merchant cash advances, the lender provides you with cash upfront. Then, the lender automatically deducts a predetermined percentage of your daily credit and debit card sales, along with an additional fee. Some MCA lenders also accept cash by using Automated Clearing House (ACH) to make regular withdrawals from your bank account.
The lender will continue to take a cut of your sales until the entire advance they provided you has been repaid in full.
Cash advance fees
Merchant cash advances carry fees. The exact fee amount varies based on the lender’s judgment of your ability to repay. To calculate your fees, the lender determines a factor rate based on your creditworthiness. This rate is multiplied by your cash advance amount to determine your final repayment amount.
For example, let’s say that you need €10,000 and your provider assigns you a factor rate of 1.5. That means that you will need to repay a total of €15,000.
Compare MCAs With Loans By Calculating Interest Rates
It’s important to understand the true cost of the money you’re getting from an MCA, especially if you’re also considering alternative financing via a loan or credit line. Since loans and credit lines have interest rates (APR), you must calculate the equivalent for any MCA you’re considering.
Calculating the interest rate provides business owners with an insight into how much an MCA actually costs, but varies on the individual repayment structure of the contract.
If you do qualify for loans, calculating the interest rate of your MCA based on the terms provided makes it possible for you to compare the cost of multiple financial products.
When it comes time to repayments, the amount withdrawn from your account varies based on the structure of your Merchant Cash Advance (i.e., the length of time allowed for repayment and where the repayment funds are coming from.)
Fixed Repayment: Your lender can request that you make regular payments. For example, you can agree to repay them €4 per day (or €120 every thirty business days) for one year.
Percentage of Sales: Your lender may opt to take a percentage of your sales (e.g., 5% of sales) for a specified period. With a percentage, the amount you pay varies. In slow months, you’ll pay less, but your overall repayment time will be longer. In busier months, you’ll pay more, leading to a shortened overall repayment period.
Qualifying for merchant cash advance
One of the upsides of a merchant cash advance is that the application process is fast and easy. The specific steps required vary based on the provider, but you can expect to:
Fill out an application
Provide documentation regarding your monthly income, typically with bank statements. If you are paying your MCA back with a portion of your credit card transactions, you’ll also need to provide your credit card processing statements.
Agree to a credit check.
In general, the application process occurs online and you will usually receive a response the day you apply. Funding occurs soon afterward — the point of an MCA is to get cash to you quickly.
Merchant Cash Advance vs. Alternative Funding
There are other ways to borrow money or increase cash flow other than MCAs and traditional loans.
It is best to familiarize yourself with all available avenues in getting quick cash for your business. Here are the most popular MCA alternatives, and below, you can see how they all differ from one another:
Business Line of Credit (BLoC): a set sum of cash with maximum borrow limit. You only pay interest on the borrowed sum.
Term Loan: a specific sum of money, often borrowed by small businesses. There are specific schedules for repayment, along with floating or variable interest rates.
Invoice Discounting: a way for your business to increase cash flow if you have unpaid invoices. You sell your invoices for early payment for a set fee.
This type of business credit doesn’t come cheap, but if you are in a tight spot, they can help tide you over until your business’ financial situation improves.
If you are a business owner and the traditional methods of business financing are closed to you, consider a merchant cash advance or one of the alternatives:
In case, you need some help to choose the right decision for your business LoanGuru would love to support you!
Just apply here.