The SMB Merchant Cash Advance Guide

Everything you need to know about merchant cash advances.

A plumbing merchant taking inventory

An Introduction to Merchant Cash Advances for Business Owners

If you’re seeking funding for your small business, a merchant cash advance (MCA) may be the solution to your problems. MCAs are used widely as an alternative to traditional loans. They’re an option for business owners who want to avoid the lengthy approval processes and strict credit requirements that come with most traditional bank loans.

Of course, all funding options such as loans, revolving credit, and cash advances have their specific advantages and disadvantages. It’s a good idea to fully understand what you're getting into before you choose to commit to a merchant cash advance, or any other type of funding.

In this guide, we will walk you through everything you need to know to make an informed decision about MCAs. We’ll cover why a merchant cash advance may (or may not) be right for you, how it works, the requirements for getting an MCA, the application process, and the pros and cons of using MCAs. It’s important for us to mention that many firms offer MCAs; rates, terms, and limitations will vary from lender to lender.

What is an MCA?

MCAs are financial products, not to be confused with loans. An MCA is when a lender purchases a percentage of your future credit card sales. When you apply for an MCA, the lender will look at the credit card receipts of your business to determine if you have the capacity to pay back funds based on your daily credit card sales.

A merchant cash advance agreement with a lender means signing a merchant cash advance contract. The fees will be included in the contract along with their methods of collection. The contract will typically state no fixed date of repayment since the advance is only considered paid once the principle and predefined interest are fully collected. Some contracts will go into detail about the screening process the lender uses to determine eligibility.

How does an MCA work?

An MCA agreement between a lender and a business owner is typically based on a number of factors, including:

  • Advance amount

    The advance amount is the lump sum you receive when MCA is approved. The funding amount is based on your business’s financial strength.

  • Payback amount

    The payback amount is the amount that the business owner must repay. It is calculated based on the amount funded plus fees called a factor.

  • Holdback

    The holdback is an agreed-upon percentage of the daily credit card receipts which are withheld to pay back the MCA.

The amount that you are eligible to advance will depend mostly on your average credit card sales. Depending on how much you need and how much the lender decides you are qualified for, the MCA can be as little as 50% of your monthly sales or all the way up to 250% of your monthly sales.

To repay the cash advance, a small percentage is calculated and is taken with each credit card sale over the repayment period. The agreed upon percentage is called a “holdback.” The lender withholds that amount each day, until the cash advance is paid back in full.

The holdback is also referred to as the “retrieval rate,” and it can be anywhere between 5% and 20% depending on the lender, the amount of your advance, your daily credit card sales, and the agreed repayment period. The advance amount will also determine the term or repayment period which can be anywhere between 90 days and 18 months.

If your business is doing well and receives more credit card transactions, you’ll repay the advance sooner. And because repayment is based on a percentage, in the event that your sales are low on a certain day, the amount taken from you is relative to your incoming cash flow.

Who Are MCAs Mainly Designed For? Who Uses Them?

MCAs are typically for businesses that need access to quick capital to cover unexpected expenses. Business owners can use the advance for any number of things such as purchasing materials for a large order, hiring new employees, preparing for a high-demand season, or buying new equipment.

A merchant cash advance is an option for businesses who are relatively new and don’t yet qualify for a traditional bank loan. It’s also ideal for the small business who doesn’t have enough assets to provide as collateral. And if you are seeking financing that is short-term, MCAs offer that along with flexible repayment terms.

MCAs are for any type of business, regardless of industry and size, who have a consistent flow of credit card transactions. It’s also one of the few options for any business who has less-than-perfect credit. Credit score requirements will vary from lender to lender. Some firms will look at credit scores while others will only care about your current capacity to repay the advance.

Because the lender will take a percentage of credit card sales, the business owner only needs to assure the lender that their daily credit card sales are steady enough to guarantee repayment. They can prove this by presenting credit card receipts from the last two or three months of business operations.

What Are the Requirements for MCAs? Am I Eligible?

Every lender is different. One lender might require that you maintain at least $2,500 in monthly credit card transactions, while another might require $5,000.

While most will require that you’ve been in business for at least a year, another might consider you for advance with less than six months time in business. Some lenders may even require that you make five or more deposits a month. Some may require less.

However, there are lenders out there who are more concerned about your credit score rather than your monthly credit card transactions. Lending firms generally want to see a credit score of at least 500 - 600. However, some lenders are willing to offer advances to businesses who have lower credit scores. Unfortunately, in these cases, the rates and fees for these MCAs are much higher than the typical percentage. Sometimes they are higher by as much as 5% to 10% the regular retrieval rates.

The general minimum qualifications for an MCA are:

  • 1+ years in business
  • $50,000+ in annual revenue
  • 500 minimum credit score

How to Apply for a Merchant Cash Advance

The MCA application process is usually very simple. Depending on the paperwork, a merchant cash advance is decided anywhere between hours to a few days. Once the business owner has is approved for an MCA, they may receive the funds in their accounts in just two short days.

Most lenders allow you to apply for merchant cash advance online. They will have a page dedicated to applications which typically involve a form that will ask you the following:

  • Loan amount
  • Company name
  • Company address
  • Contact number
  • Email
  • Annual gross revenue of your business
  • Monthly credit card volume
  • Number of years in business
  • Business owner’s full name
  • Business owner’s SSN
  • % of ownership
  • Business owner’s home address

Once you’ve agreed to the terms and conditions, you can proceed to the next step. This may involve uploading your business documents, such as:

  • Business ID
  • Credit report
  • Financial statements
  • Recent credit card processing statements
  • Recent business tax returns

If your business does not have a business credit card, it will not have a business credit score. Instead, the lender will look at whether your business has any existing loans or has ever applied for financing in the past. Expect to be contacted by an officer from the lending firm who will walk you through the next steps of the application.

If approved, credit card processing is set up. In some cases, the lender may require you to switch credit card processors. Once this is all set up, the lending firm deposits the funds in your business’s bank account usually within a few days; expect for repayment via the merchant account to begin immediately.

Pros & Cons of Financing with MCAs vs. Other Methods

There are always advantages and disadvantages when it comes to financing and loans; cash advances are no exception. Here is an overview of the pros and cons of MCAs:

Pros of a Merchant Cash Advance

MCAs offer many advantages. They’re simple, straightforward, and boast fast approvals and fund releasing.

Here’s a closer look at the pros of financing with a merchant cash advance:

Simple application process

MCA application processes are straightforward. For most lenders, you can apply entirely online by completing the application and uploading the required supporting documentation. Supporting documents typically involve credit card processing statements.

Traditional bank loans usually require a lot of paperwork and take longer to process compared to an MCA. Merchant cash advance typically requires substantially less documentation, and lending firms arrive at a decision in as short as two days.

2. Perfect credit is not required

Some businesses have a rough start and because of it, suffer from bad credit. The whole point of applying for an MCA is to get them back on their feet. With MCAs, perfect credit is not a requirement. However, most lenders will require that you meet a minimum credit score in order to qualify for an advance.

3. Flexible payments

When you take out a traditional bank loan, you will have fixed payments which means that you pay the same amount every month or whatever your terms are regardless of your cash flow. This is a struggle for businesses who have slow months.

Payments with a merchant cash advance are much more flexible since the percentage is based on your credit card sales, making your payments proportionate to whatever your business brings in. This means not having to worry about your ability to pay even for low-revenue days.

4. Fast approval and funds release

By the time most businesses apply for funding, they’re already in a bind and need the funds as soon as possible. MCAs are the better option compared to traditional bank loans in this regard. For some lenders, decisions are made within hours as long as they have all requirements and documentation needed. And once the lender arrives at a decision, funds can be delivered in just a few shorts days. In fact, some lending firms guarantee a decision and access to funding within 24 to 48 hours.

5. No collateral

If you do not repay the advance, your company assets are not at risk because there is no collateral requirement for MCAs. This relieves you from the worry about having any personal liability.

Cons of a Merchant Cash Advance

The reality is that merchant cash advances come with their fair share of disadvantages. The most glaring one is that they are one of the most (if not THE most) expensive financing option available out there.

Here’s a closer look at the cons of using MCAs:

1. MCAs are not regulated

The laws limit lending firms and banks from charging high-interest rates. Merchant cash advances can claim that because they involve future income, they are technically not a traditional loan and therefore, not bound by state usury laws. Because MCA lenders can justify that these laws don’t apply to merchant cash advances, they decide the percentages.

In desperate times, business owners may find themselves agreeing to an advance amount, extremely high retrieval rates, and otherwise unreasonable term by a lender. And because merchant cash advances aren’t regulated, the business owner is legally bound to that financial contract.

2. More expensive than traditional loans

Because the merchant cash advances are typically less than one year, lenders putting up the financing don’t have to follow the same regulations on interest rates that traditional lenders comply with by law. Business loan rates range roughly between 6.25% and 12%. With merchant cash advances, retrieval rates can range between 5% and 20%.

Merchant cash advances are comparatively more expensive than other bank loan products. According to Leonard C. Wright, CPA and Money Doctor columnist, the annual percentage rate (APR) for a merchant cash advance fee can range between 60% and 200%.

3. Shorter repayment periods

Shorter repayment terms are considered a disadvantage for business owners who are hoping for the maximum repayment period. While we mentioned earlier that repayment involves daily deductions over periods that range between 90 days and 18 months, the majority of lenders require business owners to repay their MCAs within six to eight months.

4. Limitations on business operations

MCA lenders need to protect themselves from business owners who try to cheat the system. Some business owners who have received merchant cash advances thought they were being sly by encouraging their customers to pay with cash instead of credit card. After all, without credit card transactions going through, no funds are held. Some have gone as far as offering their customers discounts when they pay in cash.

For this reason, most lenders will place limitations on how you operate your business. In some contracts, you are prohibited from discouraging your customers from paying with their credit cards, and you cannot offer special discounts for those who pay with cash. Another limitation set by MCA lenders is prohibiting business owners to switch credit card processing companies while they are still under the repayment period. In fact, some lenders will even specify in the contract that you cannot close your business, change locations, or take out a business loan until the MCA is repaid.

Why You Should Consider Alternative Funding Sources Before You Choose an MCA

On the one hand, merchant cash advances appear to offer you a quick solution to your immediate funding needs. On the other, MCAs are one of the most expensive financing options available to business owners. They will fulfill your short-term needs but beware: they can also eat away at your cash flow in bigger chunks, making it easy to get into a painful debt spiral.

When choosing the right funding for your company, the fastest choice isn't always the best choice, especially if it will cost you more in the long run. However, at Fundbox, we offer a solution that is incredibly quick, flexible, and transparent, with a flat repayment schedule.

You'll be happy to hear that there is no paperwork involved and applying takes just minutes. With Fundbox, you can expect a credit decision in under 3 minutes* by connecting your accounting software or bank account to give us insight into your business. You might be eligible for credit up to $100,000. There are no minimum credit score requirements; the only hard and fast requirement is that your business must have been in operation for at least two to three months to provide us with sufficient data to make a decision, and use a business bank account.

Fundbox gives small businesses like yours access to credit in a snap. Repayment is made easy via auto debit over a 12 or 24-week period. You only pay when you draw funds, and each week, you simply pay back part of the amount you drew, plus a flat fee. The amount you paid (minus the fees) becomes available again with each weekly repayment, similar to using a credit card. Pay us back early, and we'll waive all the remaining fees.

Essentially, you get the same convenience of repayment as an MCA which automatically takes payment from you with every credit card transaction. With Fundbox, however, you’re not suffering under high retrieval rates. In fact, when you repay early, you can actually save. At Fundbox, fees are flat; the total fees you owe are divided evenly across the repayment period. Repay early, and you could save a lot!

Fees start at just 4.66% of the draw amount for 12-week repayment. You pay the fees in equal installments over the 12 or 24 weeks. While fees may vary from client to client, we are completely transparent with our pricing, and you will always see your weekly repayment and fees before you draw.

If you’re exhausted from doing all the research on funding options for your business, you’ll find that we do things a little different. With a common-sense approach backed up with cutting-edge data science, we came up with a simple solution to give business owners access to credit when they need it.

Is Fundbox a better choice for you? Only you can decide the best choice for your business, but we encourage you to give us a look. Apart from the over 90,000 small businesses across the U.S. who trust us, Fundbox recently made it to the Forbes Next One Billion-Dollar Startups to keep an eye on in 2017.

Ready to register? Sign Up in seconds to see how much credit you qualify for.