A Merchant Cash Advance (MCA) is a form of alternative business financing that differs from a traditional small business loan. Instead of borrowing money with interest, a business receives an upfront lump sum and repays it using a portion of future sales—plus fees.
MCAs are commonly used by small businesses that need fast access to capital to cover short-term expenses or cash-flow gaps. However, because of their high cost, they should usually be considered only after exploring other financing options.
How a Merchant Cash Advance Works
With an MCA, the financing company purchases a portion of your future revenue. You receive cash upfront, and repayment happens automatically as your business generates income. Unlike traditional loans, MCAs do not have fixed interest rates or set repayment schedules. Instead, repayment depends on your sales volume.
There are two common repayment structures:
1. Percentage of Debit and Credit Card Sales
This is the traditional MCA model. The provider deducts a fixed percentage of your daily or weekly debit and credit card sales until the total amount owed is fully repaid.
Because repayment is tied directly to your sales:
1. Higher sales = faster repayment
2. Lower sales = slower repayment
Repayment timelines typically range from 3 to 18 months, depending on business performance.
2. Fixed Withdrawals from a Business Bank Account
In this structure, the MCA provider withdraws a fixed amount from your business bank account daily or weekly, regardless of your actual sales. The payment amount is calculated based on estimated monthly revenue, making repayment more predictable. This option may work better for businesses that:
1. Don’t rely heavily on card transactions
2. Prefer consistent, scheduled payments
Merchant Cash Advance Rates and Fees Explained
Instead of charging traditional interest, MCA providers use a factor rate, which typically ranges from 1.1 to 1.5.
For example:
1. Borrow $10,000 with a 1.3 factor rate
2. Total repayment = $13,000
Your factor rate depends on several business risk factors, including:
1. Industry type
2. Time in business
3. Monthly revenue and cash flow
4. Debit and credit card transaction volume
5. Personal credit score
Businesses considered higher risk generally receive higher factor rates, increasing the total cost of financing.
Keep in mind:
Factor rates often do not include additional fees, such as:
1. Administrative fees
2. Underwriting fees
3. Processing fees
These extra charges can significantly increase the total repayment amount.
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