A merchant cash advance, also called an MCA, provides alternative financing to a traditional small-business loan. With an MCA, a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
Merchant cash advances are best for small businesses that need capital immediately to cover cash-flow shortages or short-term expenses. But this type of financing can carry annual percentage rates in the triple digits and create a difficult cycle of debt. Generally, you should consider all other small-business loan options before an MCA.
Here’s what to know about merchant cash advances, how they work and what to keep in mind before choosing one for your business.
How merchant cash advances work
A merchant cash advance company provides your business with a lump sum of capital. But an MCA isn’t a loan. Instead, that provider is purchasing your future sales, and you’ll use those sales to repay the funds — plus fees.
Merchant cash advance repayments can be structured in two ways:
Percentage of debit/credit card sales
This is the traditional way an MCA is structured, in which a merchant cash advance provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full.
Unlike other types of business loans, merchant cash advances don’t have typical repayment terms. Repayment periods are based on your sales and can range anywhere from three to 18 months; the higher your credit card sales, the faster you’ll repay the advance.
Fixed withdrawals from a bank account
Merchant cash advance companies can also withdraw funds directly from your business bank account. In this case, fixed repayments are made daily or weekly from your account regardless of how much you earn in sales, and the fixed repayment amount is determined based on an estimate of your monthly revenue.
This type of MCA repayment structure allows you to calculate exactly how long it will take to pay the advance back based on the amount borrowed and can be better suited for businesses that don’t rely heavily on debit and credit cards sales.
Merchant cash advance rates and fees
Instead of a traditional interest rate, merchant cash advance companies charge their fees as a factor rate. Factor rates typically range from 1.1 to 1.5, varying based on the provider’s assessment of your business.
The factor rate you’ll receive will likely depend on your:
- Years in operation.
- Business financials.
- Debit and credit card transactions.
- Personal credit score.
Businesses whose ability to repay looks riskier will likely receive higher factor rates — and pay higher fees as a result.
The factor rate also does not include any additional fees the merchant cash advance company may charge you for working with it, such as administrative fees or underwriting fees, which will increase the total cost of your financing.
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