Understanding the Benefits of Merchant Cash Advances

Business Success

A merchant cash advance (MCA) is a type of business financing where a lump sum of cash is provided upfront in exchange for a percentage of future debit or credit card sales.

Unlike a traditional business loan, an MCA is not technically considered a loan since there is no principal balance, interest, or set repayment terms. Instead, the MCA provider purchases a portion of the business's future receivables at a discount. The business then makes daily or weekly payments based on a fixed percentage of credit card and debit card sales until the balance is repaid in full.

In summary, merchant cash advance provide fast, flexible working capital for businesses by linking repayment directly to credit card sales. This structure transfers a certain amount of risk from the business to the MCA (Merchant Cash Advance) provider.

Benefits of Merchant Cash Advances

Merchant cash advances provide several key benefits compared to traditional small business loans:

Faster Application and Funding Process

The biggest advantage of merchant cash advances is the speed at which you can get approved and funded. There is often no lengthy credit check or financial review required. Instead, businesses simply need to provide a few months of bank statements showing steady revenue and sales. This allows for funding in as little as a few days in some cases.

Based on Sales, Not Credit Score

Because merchant cash advances look primarily at a business's revenue and sales numbers, they can be obtained even with poor business or personal credit scores. Many businesses turned down for a bank loan find they still qualify for an MCA. This provides access to capital that might not otherwise be available.

Flexible Repayment Terms

Merchant cash advances do not have a fixed repayment schedule like a term loan. Rather, repayments are taken as a percentage of daily or weekly credit card sales. This means when your sales are up, you repay more; when they are down, you repay less. This flexibility helps mitigate risk.

Access to Capital for High-Risk Businesses

Some industries considered "high risk" like bars, restaurants, and gas stations can still get approved for merchant cash advances when traditional lenders balk. The quick approval process and flexible terms make MCAs ideal for many risky ventures.

Use Cases and Ideal Candidates

Merchant cash advances are best suited for certain types of businesses that can benefit most from this financing option. Some ideal use cases and candidates include:

  • Retail businesses: Retail stores often have consistent cash flow from sales but may lack strong credit or borrowing history. MCAs allow them to access capital without long credit checks. The financing can be used for inventory, renovations, marketing, staffing, or other operating expenses.
  • Restaurants: Like retail, restaurants usually have steady cash flow but can lack traditional creditworthiness. Restaurant owners can use MCAs to finance equipment upgrades, inventory orders, marketing campaigns, hiring, or managing cash flow gaps. The flexible payments make MCAs a better fit than loans for restaurants' variable revenue.
  • Professional service businesses: Law firms, marketing agencies, consultants, contractors, and other service businesses can leverage their contracted future receivables to secure an MCA. The funds can then expand capacity, hire more staff, invest in software, or bridge income gaps.
  • Rapidly growing startups: Early-stage startups often need capital to scale quickly but don't have long credit histories. Traditional lending also moves too slowly for these fast-moving businesses. MCAs offer a fast, flexible financing option to expand operations.
  • Businesses with limited credit options: Any business that struggles to qualify for bank lending due to limited operational history, credit score, or collateral can benefit from the easier requirements of merchant cash advances. MCAs open accessible financing for underserved entrepreneurs.
  • Businesses needing quick capital: The rapid funding process of merchant cash advances (often within a week) suits businesses that need urgent access to capital for time-sensitive investments or expenses. MCA speed and flexibility exceed what traditional lending can offer.

So in summary, merchant cash advances are ideal for retail, restaurants, professional service firms, high-growth startups, and any business that needs fast, flexible financing without strict credit requirements. MCAs fill a vital funding gap for underserved yet promising businesses.

The Application Process

To apply for a merchant cash advance, you'll need to provide some key documents and information to give the provider a clear picture of your business's financial health and operations. The exact requirements can vary by lender, but here are some of the typical items needed:

  • Recent bank statements - Usually 2-3 months' worth to show cash flow trends.
  • Credit card processing statements - These will be analyzed to determine your average monthly credit card sales volume. This is a key factor in sizing the advance amount.
  • A void check - Providers need your bank routing and account numbers to fund the advance.
  • Photo ID of the business owner(s).
  • Proof of business registration.
  • Tax returns - Help verify the financials you report.
  • Lease/mortgage details - If renting or owning your business property.
  • Inventory details - For retailers, key for some lenders.
  • Accounts receivable aging report - For service businesses, to assess outstanding invoices.

The application process is meant to be quick and easy, especially compared to traditional small business loans. You can often apply online or over the phone in a short call. Approvals can come in as little as 24 hours, though typically take 3-7 days. Once approved, funding can arrive in your account within a few business days. The smoother you make the underwriting process by having your information handy, the faster the overall timeline will be.

Repayment and Fees

One unique aspect of merchant cash advances is the repayment structure. Rather than having fixed monthly payments like a traditional business loan, repayments for a merchant cash advance are structured as a percentage of daily or weekly credit card sales.

The repayment amount fluctuates based on the merchant's processing volume. If sales are high, more money goes toward repaying the advance. When sales are slower, repayments are lower. This structure provides more flexibility for businesses with seasonal or fluctuating revenues.

In exchange for this flexibility, merchant cash advances typically have higher fees than conventional loans. The fee is usually expressed as a "factor rate" charged on the total amount advanced. A common factor rate may be in the 1.10 to 1.50 range.

This works out to an estimated APR between 40-80%, much higher than a bank loan. However, merchants accept the higher fees because traditional loan qualification is based on personal credit scores and financial history. The MCA approval process focuses more on the reliability of the business's credit card revenues.

The flexible repayments and faster access to capital can offset the higher fees for many businesses. It's important to run the numbers to determine if a merchant cash advance makes sense rather than simply comparing APRs. For some organizations, the repayment flexibility provides significant value despite the higher costs.