A merchant cash advance (MCA) is a type of financing where you get an advance for a portion of your future credit card sales. The MCA provider withdraws a percentage of each sale until your loan is fully paid.
An MCA offers small businesses fast funding and is often used to cover working capital expenses. This article discusses what you need to know about merchant cash advances and how to choose the best lender for you in 2023.
Why Consider a Merchant Cash Advance?
With this type of funding option, the lender gives you a lump sum upfront in exchange for a percentage of your future sales for a fee. An MCA isn’t technically a loan; it’s an advance based on the volume of your sales receipts.
A merchant cash advance is a type of small business financing. They’re easy to qualify for, which is why they’re an alternative solution for business owners who may not be eligible for traditional loans.
Other benefits of a merchant cash advance include:
Quick approval: MCAs offer small business owners quick access to business funding opportunities. The application process is usually done online with minimal documentation requirements. And borrowers can receive money in their business bank account within one business day.
Flexible personal credit rating requirements: Merchant cash advance providers offer more flexible personal credit requirements than traditional banks. Since you’re paying back the loan through debit and credit card transactions, lenders care more about your monthly revenue than your credit history. This is why startups and business owners with bad credit may get approved for MCAs.
No collateral: MCAs are a type of unsecured business financing. So, MCA providers don’t typically require physical collateral to secure your funding.
Repayment based on your sales: Your repayment schedule is based on a percentage of your sales. You don’t have to worry about coming up with a fixed payment amount — you pay your loan based on how well your business is doing.
What Is a Merchant Cash Advance Lender?
A merchant cash advance lender is a financing company that provides funds to businesses in exchange for a percentage of their daily credit card sales. Ensure you understand all the terms and conditions of your agreement to avoid miscommunication or surprises.
A merchant cash advance company approves your business for funding. You then receive the lump sum amount you agreed on upfront. You repay the cash advance plus fees from your credit card sales. An MCA is also called a credit card processing loan because it’s commonly used by companies that accept payments through a business merchant account.
How to Choose the Best Merchant Cash Advance Lender for You
A merchant cash advance is a financing option that offers quick and easy approval for businesses. It also has flexible requirements, making it accessible to business owners with poor credit. However, the repayment terms for a merchant cash advance are different from traditional small business loans.
These terms can put your business in a difficult situation if you’re not careful. Be very mindful of the cost of borrowing. Merchant cash advance fees are quite high compared to other short-term loans like business lines of credit.
Also, your payment frequency could be daily or weekly. Ensure your cash flow can handle paying off the debt right away.
You can use MCA funding for all types of business expenses, such as handling emergencies, paying off other loans, or covering the wages and salaries of your employees. Most businesses that are successful in leveraging business cash advances use it to fund high-profit opportunities.
For example, you can cover the cost of an MCA if you use it to stock up on quick-turnaround inventory. But it’s definitely not something you’d use to buy equipment or real estate.
With this in mind, look for merchant cash advance lenders with clear terms. Ensure you understand the payment structure and know all the fees they’ll charge before you agree on a contract.
Unfortunately, merchant cash advances are only covered by limited regulation because they’re not subject to federal regulation. Be wary of predatory companies using misleading marketing tactics promising to lend you capital.
What to Look for When Choosing a Merchant Cash Advance Lender
To find the right merchant cash advance for you, compare how much each lender will cost you. To do that, familiarize yourself with the terms below.
The Max Lending Amount
When you’re looking for a merchant cash advance lender, consider the maximum lending amount they can grant you. Max lending amounts vary greatly by provider. The range can be as low as $2,500 and as high as $1 million. However, on average, most lenders offer amounts between $5,000 and $500,000.
Of course, you shouldn’t borrow $500,000 if you don’t need it. But it’s also important to assess how much your business needs and apply to the lender who can lend you that. You’ll have to look for more funding if the provider can’t cover the amount you need, which is more work for you.
The Factor Rate
The factor rate is what merchant cash advance companies charge instead of traditional interest rates. Factor rates can be as low as 1.09 and as high as 1.5.
The rate you get depends on typical qualification requirements, such as your time in business, monthly or annual revenue, and personal credit score. In addition, the lending company will consider your volume of sales transactions, your industry, and other requirements they may have.
Unfortunately, the higher the factor rate you receive, the higher fees you’ll pay. Multiply the cash advance by the factor rate to calculate your total repayment amount. For example, if you’re approved for an advance of $100,000 for a factor rate of 1.25, your total repayment amount will be $125,000. This means you’ll be paying $25,000 in fees.
The Deduction Percentage
When you apply for an MCA, you and the lender agree on an advance amount, a factor rate, and a deduction percentage. The deduction percentage — also called the holdback percentage — is what will be withheld from your daily sales as payment. The holdback percentage will apply until your balance is paid in full.
Deduction percentages vary per provider, ranging from 5% of sales and reaching as high as 20% of sales. On average, the holdback percentage is 10% of sales.
So, before agreeing to a merchant cash advance, ensure your cash flow can sustain having this amount withdrawn daily without putting your business in jeopardy.
The Payment Period
The payment period for MCAs typically ranges from three months to two years. Pay attention to the repayment terms of your agreement because there are two ways an MCA payment term can be structured.
The popular and most common way to repay an MCA is as a percentage of your sales revenue. The merchant cash advance provider automatically withdraws the deduction percentage daily or weekly from your sales until your loan is paid in full.
You won’t have a fixed repayment term with this type of agreement. You could repay your advance in three months or 12 — it all depends on your sales transactions.
The other way to pay an MCA is through fixed withdrawals from your bank account. You and your lender agree to a fixed amount to be deducted from your bank account daily or weekly. You also agree on a fixed repayment period — three months to two years.
Each repayment method has its advantages. Weigh the benefits to see which will suit your business needs and cash flow best.
The Payment Frequency
Merchant cash advance lenders collect either daily or weekly. This is a payment frequency that’s not unique to MCAs, but it’s also one of its most identifying characteristics.
Discover Top Merchant Cash Advance Options From Clarify Capital
There are so many aspects to consider when looking for a merchant cash advance lender. First, make sure they’re a legitimate company. Next, check if they have flexible requirements. Then, see if they offer a quick and easy application process.
Most importantly, calculate the overall cost of your merchant cash advance based on what the company offers.
When you work with Clarify Capital, you don’t have to do all that. We work with more than 75 lenders to find the best rate for you. And you’ll have a dedicated Clarify advisor to work with you throughout the process. Your advisor will ensure you understand the terms of your loan. It’s part of our commitment to keeping things simple, convenient, and transparent.