A Beginner’s Guide to Merchant Cash Advances

Merchant cash advances aren’t loans. They’re a quick, easy way to fund your business without collateral and little paperwork involved. It’s a method of financing where the business owner agrees to sell future receivables at a discounted rate and, because it’s not attached to collateral,

cash advances are not tied to any personal or business assets.

While merchant cash advances are a convenient option to get cash for your business, there are some disadvantages that you should consider before applying for additional funds.

After you finish reading this blog post, you’ll understand:

What a merchant cash advance (MCA) is
Pros and cons of MCAs
What types of businesses should consider an MCA
Alternatives to MCAs

What is a Merchant Cash Advance?

A MCA gives businesses cash upfront that is a lump sum payment in exchange for a percentage of a business’ daily transactions. It’s an advance payment against your business’ future income, and the amount of funding you receive is based upon your average credit and debit card sales. Because MCAs aren’t loans, there are no loan payment books, no third party people who charge hidden fees every step of the way, and there is no collateral attached to the funded amount. To settle a MCA, a fixed percentage from each sale of your credit/debit transactions or a fixed ACH dollar amount is retrieved from your business checking amount daily or weekly.

A MCA gives businesses cash up-front that is a lump-sum payment in exchange for a percentage of a business’ daily transactions.

Pros of Merchant Cash Advances

Merchant cash advances have plenty of advantages for small businesses that need funds fast. Here are several things to consider if you do apply for a cash advance.

Streamlined Application Process

Just like applying for a traditional loan online, business owners can apply for MCAs by answering several easy questions about their business finances. MCA applications are available online Many application forms take only a few minutes and business owners can upload relevant documents like tax returns and bank account statements directly to the application.

Fast Access to Funds

A huge selling point for businesses is how fast businesses are approved and funded. Approved businesses can be approved by lenders within 48 hours and funds are deposited in the business’ bank account within a matter of days. The short wait time is great for businesses that need to cover unexpected costs without the hassle of going through a traditional lender.

Credit Is Not a Deciding Factor

While most loans require strong personal and business credit, merchant cash advances are based on your future earnings and how consistent your credit and debit sales are. Lenders are more concerned with how long you have been in business and the consistency of your monthly average sales. Keep in mind that paying off your MCA will not help your business to build credit.

No Collateral Needed

Merchant cash advances are technically unsecured business loans so collateral is not required. It’s common to provide some type of collateral to receive a loan, but with MCAs you don’t have to put any of your personal or business assets on the line to obtain a cash advance. You will not have to worry about losing any of your assets if your sales drop off one month or if you struggle to repay the money.

The Downsides of MCAs

There are plenty of reasons why small businesses apply for MCAs, but even MCAs are far from a perfect borrowing option. Here are several reasons why you may reconsider applying for a quick cash advance.

High Annual Percentage Rate

Depending on the size of your MCA, your APR could actually be in the triple digits, which is far more expensive than traditional bank loans. The size of your APR will depend on the lender you borrow from, how long it will take to be repaid in full and the strength of your business’ card sales. In addition, the faster you pay back the MCA and the higher your credit card sales are, the higher the APR on the MCA will be. For example, if you receive $10,000 from a lender with a factor rate of 1.2, you’d be paying back $12,000 in total.

You Need Strong Credit and Debit Card Sales

Businesses that lack a steady stream of card sales may have a difficult time getting approved for a cash advance, since lenders are paid back based on the volume of card payments processed. While you may not need a strong credit score, your business does need to have an established history of credit and debit card revenue in order to receive funding.

Not Subject to Federal Regulation

Because merchant cash advances are considered commercial transactions and not traditional loans, they are not subject to federal regulations. MCAs are governed by the Uniform Commercial Code in each state instead of banking laws like the Truth in Lending Act, and are exempt from laws that prohibit charging fees above industry standard interest rates.

No Collateral Needed

Who Should Consider MCAs for their Business?

Businesses that don’t qualify for a traditional loan from the bank or financial institution should consider a merchant cash advance if they’re in need of fast capital. MCAs are a good option for businesses that also have a solid history of credit card transactions, like a restaurant or retailer. Because MCAs don’t require a strong credit history, newer businesses with a decent amount of monthly credit card sales should also consider applying if they need cash quickly.

At Lendr, some of the businesses we fund include:

Bakeries
Bars
Convenience Stores
Gyms/Fitness Centers
Restaurants
Travel Agencies
… and more.

Alternatives to MCA Financing

Not all businesses should apply for a merchant cash advance; it really depends on your current financial needs and history of sales. If you’re a slightly newer businesses with a steady stream of monthly revenue but no credit history, you may want to apply for an MCA. But before you submit an application, consider some of the other available financing options that may be more appropriate for your business.

Term Loans

A term loan is kind of like a mortgage; you borrow the money and repay the loan back over a period of time at a fixed or variable rate. The loan itself may be secured or unsecured, and the APR is more in your favor than the APR on a merchant cash advance. You could also look for a short term alternative loan, which usually means you can get out of debt faster.

Business Line of Credit

Unlike a regular loan, a business line of credit is more flexible than regular loans and you are authorized to borrow up to a specific amount, paying interest only on the money borrowed. As long as you don’t exceed your credit limit, you can draw and repay the funds as you wish, so a business line of credit is a good option for businesses with short-term expenses.

Equipment Financing

If your business needs new equipment, this is a financing option you should seriously consider. You can use these loans to purchase virtually any type of equipment, but how much you borrow depends on the type of equipment and whether it is used or new. Additionally, your equipment serves as collateral on the loan in case you cannot repay back the money. Equipment loans are usually kept at a fixed interest rate, so your monthly payments will stay the same.

Business Credit Card

A benefit of having a credit card for your business is you can earn rewards and points as you cover your business expenses. Before you apply though, consider this: your business credit card could impact your business credit score and sometimes your personal credit too. To apply for a card, you’ll need to provide your personal credit history and while collateral is not always necessary, you may be required to agree to a personal guarantee.

For businesses, there are multiple ways to receive financing outside of applying for a traditional bank loan. Which option you choose to go with, however, will depend on your business needs and current financial circumstances, as well as future projections for your business. Take time to thoroughly research every option available to your business before applying.

At Lendr, we’re happy to walk through the best options for your business. Simply fill out our quick application form and you’ll receive a personal call from a funding expert within 24 hours!