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Merchant Cash Advance

Merchant Cash Advance

Alternative to lengthy approval processes and strict credit requirements for traditional term loans

A merchant cash advance (MCA) provides unsecured capital to small business owners on future credit card sales, providing small businesses an alternative to traditional bank loans. MCA quickly provides cash for businesses, allowing you to borrow against future earnings to access that capital today.

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How does a merchant cash advance work?

A Merchant Cash Advance (MCA) offers businesses quick access to capital by advancing funds based on future sales. This alternative financing option is particularly useful for businesses with fluctuating revenues or those needing immediate funding without the lengthy approval processes of traditional loans.

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Understanding Merchant Cash Advances

A merchant cash advance is a type of business financing that provides a lump sum of cash in exchange for a percentage of future sales. Unlike traditional loans, MCAs do not have fixed monthly payments or interest rates. Instead, repayment is based on a portion of daily or weekly sales, making it a flexible option for businesses with variable income streams.

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The Mechanics Behind Merchant Cash Advances

  1. Application and Approval: The MCA process begins with an application where the business provides details about its financial performance, such as bank statements and credit card processing history. Approval is typically fast, often within 24 to 48 hours.
     

  2. Funding: Once approved, the business receives a lump sum payment. The amount is usually determined based on the business's average monthly sales or anticipated future revenue.
     

  3. Repayment: Repayment is made through a percentage of daily or weekly sales, known as the "holdback" rate. Payments adjust based on sales volume—higher during busy periods and lower during slower times. Alternatively, some MCAs offer fixed ACH (Automated Clearing House) payments.
     

Costs and Fees Associated with Merchant Cash Advances

MCAs use a factor rate rather than an interest rate. Factor rates typically range from 1.1 to 1.5, depending on the lender, business performance, and risk assessment. Additional fees, such as administrative or processing fees, may also apply.

Example of a factor rate: If you receive a $10,000 advance with a 1.2 factor rate, you will repay $12,000 ($10,000 x 1.2), plus any applicable fees.

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Calculating Your Merchant Cash Advance Costs

Calculating the total cost of an MCA involves multiplying the advance amount by the factor rate and adding any additional fees.

Calculation formula:

  • Advance Amount x Factor Rate = Base Repayment Amount

  • Base Repayment Amount + Fees = Total Repayment Cost

Example:

  • Advance Amount: $10,000

  • Factor Rate: 1.3

  • Fees: $500

Calculation: $10,000 x 1.3 = $13,000 + $500 = $13,500 total repayment.

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Advantages and Disadvantages of Merchant Cash Advances

Advantages:

  • Fast Funding: Approval and funding can occur within a few days.

  • Flexible Repayment: Payments fluctuate with sales, easing cash flow management.

  • No Collateral Required: MCAs are unsecured, so assets are not at risk.

  • Easy Qualification: Lenders focus on sales history rather than credit scores.

Disadvantages:

  • High Costs: Factor rates often result in higher repayment amounts than traditional loans.

  • Impact on Cash Flow: Daily or weekly payments can strain cash flow, especially during slow periods.

  • Lack of Regulation: MCAs are not regulated like traditional loans, which may lead to unfavorable terms.

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Exploring Alternatives to Merchant Cash Advances

  • Term Loans: Fixed repayment schedules and predictable costs.

  • Business Lines of Credit: Flexible access to funds when needed.

  • Invoice Financing: Advances based on unpaid invoices.

  • SBA Loans: Government-backed loans with competitive rates

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Ideal Businesses for Merchant Cash Advance Solutions

Merchant cash advances are best suited for businesses with consistent credit card sales or predictable receivables, such as:

  • Retail stores

  • Restaurants and cafes

  • E-commerce businesses

  • Service-based companies with steady customer transactions

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Frequently Asked Questions

  • What is a factor rate? A factor rate is a fixed cost applied to the advance amount, typically ranging from 1.1 to 1.5. Multiply the advance amount by the factor rate to calculate the base repayment.

  • How is repayment collected? Repayment is collected through a percentage of daily or weekly sales or via ACH withdrawals, depending on the lender.

  • Can I qualify for an MCA with bad credit? Yes, MCA providers often approve businesses with less-than-perfect credit, focusing more on sales performance than credit scores.

  • Are there restrictions on fund usage? No, businesses can typically use MCA funds for various purposes, including inventory purchases, equipment upgrades, or operational expenses.

  • What happens if my sales decline? If sales decline, repayments decrease since they are tied to sales volume. However, this may extend the repayment period.

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By understanding the mechanics, costs, and alternatives of merchant cash advances, businesses can make informed decisions to secure the right financing for their needs.

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Ready to Apply for a Merchant Cash Advance?

Contact us today to discuss your financing options and start your application process. Our team is here to help you find the right funding solution for your business needs. 

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