Businesses that need quick access to working capital might consider a merchant cash advance (MCA) as an option. A merchant cash advance can be a convenient lifeline for your business by offering an immediate, short-term financing solution if cash flow is low. It can also be a way for businesses to secure fast capital if they otherwise don’t qualify for a conventional business loan.

What is a Merchant Cash Advance?

Merchant cash advances, also called business cash advances, are not small business loans. Instead, they’re a lump-sum advance against your business’s future card sales. The MCA company that advances the money establishes the cost of borrowing the advance. In addition to the cash advance amount, you’ll pay an agreed-upon amount of your business’s debit and credit card sales, and possibly other fees.

Since business cash advances don’t charge an interest rate, that’s typically applied to other small business loans, like business term loans and business lines of credit, MCAs are a largely unregulated financing option. 

Merchant Cash Advance Details: Rates and Terms

When you receive a business cash advance, the MCA company provides you with a one-time cash advance. You can use these funds toward any business purpose, whether it’s toward a business opportunity, addressing a critical equipment repair, or other expenses.

The lender will then set up automatic withdrawals via your business’s credit card processor; in some cases, a lender might allow payments collected through a business bank account. 

A predetermined amount of each card sale is forwarded to MCA company as repayment toward your merchant cash advance at recurring intervals. This arrangement continues until you’ve repaid the debt, plus fees.

Interest Rates for Merchant Cash Advances

Merchant cash advances use a factor rate, not an interest rate like other kinds of small business loans. Factor rates are expressed as decimal multipliers — typically, between 1.15 and 1.5. The cash advance amount is multiplied by your factor rate to calculate the total combined principal and interest that your business owes.

For example, if you borrowed a merchant cash advance for $40,000 at a 1.5 rate, your total borrowing cost would be $60,000. Be aware that this sample calculation doesn’t include any applicable fees charged by the MCA company. 

How much a lender will ultimately charge for an advance depends on how long you’ve been in business, your industry, your average monthly card sales, and the amount you’re borrowing.

Paying Back a Merchant Cash Advance

Generally, repayment is pulled from your business’s sales or from your business bank account on a daily, weekly, biweekly or monthly basis. Since the repayment timeline is directly impacted by the business’s sales volume, the time it takes to repay a merchant cash advance differs between businesses. 

Businesses that have high card sales might be able to repay their merchant cash advance sooner, compared to a business that closes fewer sales.

Pros and Cons of a Merchant Cash Advance

Benefits of a Merchant Cash Advance

• No collateral needed. Merchant cash advances don’t require collateral since remittance is automatically conducted through future card sales. This can be advantageous if you don’t have collateral to offer.
• Fast funding. Generally, MCA companies can approve and fund an approved cash advance application within 24 to 72 hours. If you need cash flow urgently, you might even find a lender that offers merchant cash advance same-day funding.
• Flexible requirements. There’s typically no minimum credit score requirement or a required length of time you’ve been in business since this kind of financing isn’t a traditional small business loan. Instead, approval relies on other factors, like your average monthly sales figures.

Disadvantages of a Merchant Cash Advance

• Lowers cash flow. The lender automatically claims a portion of your business’s card sales to satisfy any remaining unpaid cash advance debt. This means less cash flow that’s accessible for you to use while you’re in repayment.
• Higher fees. The short-term nature of a merchant cash advance means that it isn’t regulated. Merchant cash advance rates and fees are often higher than other types of small business financing options.
• Imposes restrictions on your business. Some lenders prohibit business owners from implementing changes that could modify their ability to remit a merchant cash advance. For example, an MCA company might limit your ability to change your business’s credit card processor, change your business hours, or relocate your business while you’re in repayment.

What you Need for a Merchant Cash Advance 

Since merchant cash advances are an alternative business financing solution, they’re typically easier to qualify for, compared to a conventional business term loan. This means that there’s more flexibility if your business is relatively new or if it has a history of poor credit.

In general, businesses must be equipped to accept credit card and debit card sales, and monthly sales volumes must satisfy the lender’s criteria. Lenders also require that your business is in good standing with its credit card processing company since this is how lenders secure remittance on the cash advance.

Applying for a Merchant Cash Advance

Many MCA companies let you apply for a business cash advance online. Depending on the lender, you might be asked to supply the following documentation: 

• Identification
• Basic business information (e.g. industry, years in business, etc.)
• Bank statements 
• Merchant account statements

It might also request additional information, such as accounts receivable reports, and sometimes perform a personal or business credit pull. If it conducts a credit check, remember that your business’s card sales volume and the amount you’re borrowing are weighted more heavily.

If you’ve decided that a merchant cash advance is a fit for your needs, or you need help deciding which loan option to use, Llama Loan can help. We can connect you to vetted cash advance options in a matter of seconds and can tell you if you are making the right decision. Get started today.

The Bottom Line

Although having a reserve of cash savings for your business is ideal, a merchant cash advance can temporarily ease cash flow pressures when revenue is low. It allows you to manage your business and keep it moving forward. A recent report released by the Federal Reserve found that application rates for merchant cash advances increased in 2022, compared to the year prior.

That said, you’ll need to weigh the benefits of a business cash advance against its disadvantages to decide if it’s truly right for your business.