What is a Merchant Cash Advance
You’re a small-business owner needing capital now, and a merchant cash advance looks like a good deal. Before you act, consider that quick cash could cost you. Here, you will learn how merchant cash advances work.
MCAs are famous for carrying annual percentage rates — the total cost of a loan, including all fees — in the triple digits. These costs, as well as the daily repayment schedule, can cause serious cash-flow problems. In some cases, MCAs lead to a debt trap. Where it’s virtually impossible to repay, and you must refinance into another — and yet another — MCA or file for bankruptcy.
That’s why many consumer advocates and nonprofit lenders consider MCAs a financing option of last resort. Below, we list the pros and cons of merchant cash advances to help you make a wise financing choice.
IN THIS ARTICLE
How merchant cash advances work
Calculator: Find the cost of a merchant cash advance
Why do borrowers opt for them
Reasons to be wary
Find alternatives to MCAs
How merchant cash advances work
Traditionally, a merchant cash advance was primarily for businesses whose revenue came from credit and debit card sales, such as restaurants or retail shops. However, now, merchant cash advances are becoming more widely available to other types of businesses that don’t rely heavily on credit card or debit card sales.
Merchant cash advance providers say their financing product is not technically a loan. A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future sales.
Merchant cash advance repayments can be structured in two ways.
You can get an upfront sum of cash in exchange for a slice of your future credit and debit card sales. Or you can get upfront cash that you can repay by remitting fixed daily or weekly debits from your bank account. As ACH, for Automated Clearing House, withdrawals.
This option has become the most common type of merchant cash advance. Sean Murray is a former merchant cash advance broker and founder of the trade magazine deBanked. They’re called ACH merchant cash advances and allow providers to market to businesses. That isn’t primarily tied to credit and debit card sales.
Instead of having a fixed monthly payment from a bank account over a set repayment period, with a merchant cash advance, you make daily or weekly payments, along with fees, until the advance is fully paid off.
How much you’ll pay in fees?
Your ability to repay the merchant cash advance determines it. Based on risk assessment, the merchant cash advance provider determines a factor rate ranging from 1.2 to 1.5. The higher the factor rate, the higher the fees you pay.
You multiply the cash advance by the factor rate to get your total repayment amount. For example, an advance of $50,000 with a factor rate of 1.4 represents a total repayment of $70,000, including fees of $20,000.
Total advance |
Factoring rate |
Total fees |
Total repayment |
| $50,000 | 1.4 | $20,000 | $70,000 |
Here is a more detailed breakdown of how merchant cash advance repayments can be structured:
Percent of credit card sales: The merchant cash advance provider automatically deducts a percentage of your credit or debit card sales. Until you repay the agreed-upon amount in full. Let’s say you need $50,000 to purchase a new oven for your restaurant.
You apply and get approval for a merchant cash advance of $50,000. The provider has assigned a factor rate of 1.4 on the contract, so you owe $70,000.
The repayment period typically ranges from three to 12 months; the higher your credit card sales, the faster you’ll repay the merchant cash advance.
In this case, let’s say your merchant cash advance provider deducts 10% of your monthly credit card sales until you repay the $70,000, and your busy restaurant averages $100,000 in credit card revenue per month. You’d repay $10,000 monthly, with daily payments of $333 in a 30-day month. At this pace, you’d pay off the advance by the seventh month. But if your revenue dropped to $70,000 per month, you wouldn’t repay the merchant cash advance in full until the 10th month, paying $233 daily.
Fast funding equals shorter terms
As we explain below, the speed with which you repay your loan is a factor in determining your APR and can help drive it into the triple digits.
The predetermined percentage of sales is an estimate based on your projected monthly revenue. Since your sales can fluctuate, the speed with which the loan is repaid could be longer or shorter than expected, says David Goldin, CEO of Capify, a merchant cash advance provider, and president of the Small Business Finance Association, a trade association that represents merchant cash advance companies. “Eighty percent of the time, it takes longer than the purchaser thought it would take.”
Fixed daily withdrawals: This kind of agreement lists a daily or weekly payment to be withdrawn based on an estimate of your monthly revenue. For example, a business with $100,000 in monthly revenue would owe $333 per day or $2,331 per week based on a percentage of sales of 10%.
In contrast to the repayment structure tied to the credit card or debit sales, where the payments fluctuate with sales, your payment with this method does not vary. This means that you will pay the same amount regardless of whether sales are down or up.
Calculate the cost of a merchant cash advance
Your annual percentage rate represents the total borrowing cost of your merchant cash advance, including all fees and interest. This figure also depends on how long it takes you to repay the advance in full, furthermore. Use the APR calculator below to compare the borrowing cost of your merchant cash advance with that of other small-business loans.
Why borrowers opt for MCAs
Although merchant cash advances are a financing option of last resort, they do have their pluses:
- They’re quick. You can often get an MCA within a week or so without heavy paperwork. Providers look at a business’s daily credit card receipts to determine if the owner can repay.
- You won’t lose your home. MCAs are unsecured, so you don’t need collateral.
- This means you don’t have to forfeit any personal or business assets if your sales plunge and you fail to repay. “If the company goes out of business, I’m out of luck since it’s non-recourse,” Goldin says. “There’s no absolute repayment in a correctly structured merchant cash advance.”
- However, the MCA provider may require a personal guarantee, a written agreement that makes you personally responsible for repaying the advance. If this is the case, the MCA provider may still try to recoup any losses.
- When sales are down, your payment may be too. When the repayment schedule is based on a fixed percentage of your sales, repayments adjust based on how well your business is doing.
Still, MCAs are far from a perfect borrowing option, and you can get some of these advantages with other types of financing products, here are some downsides:
Reasons to be wary of MCAs
- MCAs have high APR, typically 40-350%
- MCAs more expensive than traditional bank loans, online small-business loans, business credit cards
- Higher credit card sales mean higher APR
- No benefit to repaying early, fixed fee regardless of repayment time
- No federal oversight, the industry is regulated by state laws
- Credit scores may be pulled during the application
- Risk of the debt cycle, daily payments may strain cash flow
- Contracts can be confusing, and terms unfamiliar
- MCA providers do not provide APR, making comparison difficult.
To summarize what an MCAs is:
As a small business owner, you may be looking for financing options to help grow your business. One option to consider is a merchant cash advance (MCA). MCAs are a type of financing that uses a lump sum advance amount, which is repaid through a percentage of your future credit card sales. The factor rate, which is used to calculate the advance amount, is determined by your personal credit score and the daily or weekly credit card transactions of your business.
Before applying for a merchant cash advance, it’s important to understand how they work and the pros and cons. MCAs can be a great option for small businesses with bad credit or cash flow issues, but it’s essential to understand the repayment terms. They can be more expensive than traditional loans, and the repayment terms can be less flexible.
Why BitX Funding for MCA’s
BitX Funding is a great place to apply for a merchant cash advance if you are looking for financing options. It is significant to compare the costs of MCAs to other financing options, such as business bank accounts, and consider whether a cash advance is a right choice for your business. Make sure to consider the pros and cons and all the terms and conditions before making any decision.
