top of page

What Is A Merchant Cash Advance?

By definition, a Merchant Cash Advance (now referred to as Revenue or Sales-Based financing) is a purchase of Future Receivables at a discount. The Buyer is the Funding company and the Seller is the Merchant. The funding company advances the buyer funds at closing which is to be paid back over time via daily, weekly or bi-monthly payments. An MCA agreement must have an indefinite term for repayment contingencies. 


A business owner in need of quick access to capital may be wondering if a Merchant Cash Advance (MCA) / Revenue-based financing is right for your business. As opposed to a typical term loan, the approval process for an MCA (aka Working Capital or Revenue Based financing) is short, can be done online and the credit requirements are minimal.

Most funding companies make a soft pull on your credit, but having a lower than average credit is generally not a problem since some funders don't even have a minimum credit score required. Advance amounts typically range from $2,500 to $1,000,000. Closing can be done in 1-2 days.

The Process

You can apply for MCA financing in minutes and get an offer within hours. Businesses are typically required to provide documentation such as bank statements and credit card statements if they have any, Proof of ownership, valid Driver's License, and other supporting documents. 
Terms of the offer enable you to repay the advance as a % of sales, or in a fixed Daily or Weekly amount, meaning it's set based on an amount that won’t greatly impact your cash flow.
Funding approval could take place within 1-2 days once all contracts are signed and any other documents verified. Funds are wired or sent via ACH to your bank account that was underwritten.

However, there are also some downsides to merchant cash advances, including the fact that they are usually pricier than traditional small business loans. Merchant cash advance financing generally cost 20% to 50% more than the principal amount. And unlike traditional loans with APRs, your daily payments don’t diminish the interest-bearing principal amount — the fee is due no matter how quickly you repay the advance.

In addition, depending on your state, you may be less protected than you would be when taking out a traditional loan. Merchant cash advance regulation is less developed since MCAs are not technically loans. As a result, some state courts have said that typically state usury laws or licensing requirements wouldn’t apply to MCA providers.

As you search for the right merchant cash advance offer, it’s important to compare your options. There are over 150 providers on the market, but some offer better rates than others, and not all may provide advances in the amounts you need. 

Why borrowers may take an MCA
Although merchant cash advances are typically an expensive financing option , they do have their benefits:
Speed! You can get an MCA within a week or so from submitting all required information and very often within 2 days. Providers look at a business’s bank account true sales deposit volume, average daily balances, credit card sales, other MCA financing or loan payments to determine if the owner can repay.

Physical collateral isn't required. MCAs are unsecured, so there isn’t any  physical collateral required. This means you don’t have to supply business assets upfront to back your financing and risk losing those assets if you can't afford to repay. Be aware though if the Funder is going to file a UCC(Uniform Commercial Code) which can be held over the assets of the company.

Repayment flexibility in slow times. The Repayment schedule is either based on a fixed percentage of your credit card sales or more commonly now a fixed daily or weekly amount based on your estimated future receivables. In the case of the fixed daily payments the repayment amount may be adjusted upon request if your sales slow down.

Example of Merchant Cash Advance Contract
A restaurant owner needs funding to cover the improvements he wants to make in the decor and seating capacity in his restaurant. He thinks he will need $50,000 to get everything done. He talks to his bank but even though he might qualify it will likely take 45-60 days to finalize a loan and the owner needs to start asap. 
So he gets in contact with a company that offers merchant cash advances. 

He submits all necessary documents, gets approved, and within 2 days he gets the funds wired to his business bank account. 

The contract(called a purchase of future receivables) is for the owner to receive

$50,000 at a Factor Rate of 1.30 over 10 months, which equals a $65,000 payback via a Daily ACH.

         [$50,000 x 1.30 = $65,000]
That's 210 Daily payments(using 21 days/month) at $309.52
If there is a Weekly payment option the amount would be $1,547.61.
The payments to the Funding company are automatically withdrawn each day or week until the $65,000 is paid back.

If the borrower has any issues meeting their payments they must immediately call the funding company or they will be penalized heavily per the contract.


Pros of Merchant Cash Advance Financing

  • Flexibility: One of the main advantages to merchant cash advances is that payment amounts are not set in stone if revenue changes to the detriment of your business. The obligation to pay is linked to the business’ actual revenue. It can be helpful for businesses that have fluctuations in their cash flow.

  • A high credit score not required: Since MCAs are based more on your business’s monthly cash flow, average balances, and amount depost transactions,  your personal and business credit don’t play as large a role in determining your eligibility as say a business credit card. It still helps as good credit will lead to a better Factor Rate. However, if your business consistently generates a high volume of deposits or receivables from credit cards or debit card payments, you may be able to qualify even with a credit score below 550.


Cons of Merchant Cash Advance Financing

  • High factor rates: MCAs can be very expensive when comparing merchant cash advances to loans, lines of credit or asset-backed financing. Some MCA Funders may have higher factor rates and fees than others for certain borrowers and business types but generally they are all a high cost of capital. 

  • Paying early increases relative cost: Since rates are not amortized over a repayment term, if your revenue increases and you pay back the advance ahead of schedule, your effective APR increases. However, many MCA direct funding companies will offer an Early Pay Discount in the contract so be sure to ask if that option is available. There is no penalty for paying early since the fees included are still the same.

  • Underwriting or other fees: In addition to high factor rates, some MCA providers also tack on extra underwriting or processing fees. These are typically debited from your account shortly after an advance is disbursed or deducted from the total advance amount then sending you the difference.


Comparing merchant cash advances and term loans

Because of the drastic increase of merchant cash advances over the last 5 years, traditional small business lenders were forced to improve their product offerings and offer fast and flexible loans in order to stay competitive.


The technology deployed to speed up merchant cash advances helped disrupt the traditional financing industry and opened the doors for a relatively new industry of online business lending. Online lenders offer a variety of services and financing options that resemble the ease and speed of a cash advance. The emergence of these alternative resources gives merchants many more resources for working capital, growth needs, and operating expenses. The future is bright for both products it is just a matter of who is offering them.

bottom of page