What Is a Merchant Cash Advance?

Merchant Cash Advance Explained in Less Than Four Minutes

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A merchant cash advance (MCA) is a short-term financing option in which a business receives a lump sum of funding and pays the money back incrementally. A percentage of the company’s daily or weekly credit or debit card sales is normally deducted as repayment for the funding. 

In this article, we’ll discuss the details of what a merchant cash advance is, how it works, and why it’s important for business owners to know the basics of this funding option.

Definition and Examples of a Merchant Cash Advance

A merchant cash advance is a type of short-term funding in which a business gets a set amount of cash upfront from a financing provider, and then typically repays the money with a percentage of daily or weekly credit or debit card sales.

Rather than making a set amount of monthly payments, a small percentage of your debit or credit card sales is automatically withheld to repay the merchant cash advance. This continues until the debt has been paid off.

For example, if you were to take out a merchant cash advance for a renovation to your small business, the company would give you a lump sum that you could use right away. The lender would then take a percentage of your daily card sales until your balance, plus interest and fees are paid in full. 

Merchant cash advances commonly have higher rates and fees than other lending products, and can often attract predatory lenders. They’re usually recommended as a last resort when it comes to funding options.

  • Acronym: MCA

How a Merchant Cash Advance Works

A merchant cash advance is provided by certain small business finance providers. It is considered an alternative to a traditional small business loan. While MCAs have some perks that can make them attractive to businesses, they can also have a lot of drawbacks that small business owners need to be aware of. 

Advantages of a Merchant Cash Advance

Applying for a merchant cash advance requires substantially less paperwork and documentation than applying for a loan or line of credit, and there is no fee to apply. Upon applying, a business typically must submit bank statements showing months’ worth of revenue in order to qualify for funding. 

Merchant cash advances have a waiting period of as little as three to five days, and an easy approval process—even for businesses with poor credit history.

Because merchant cash advances are classified as commercial transactions and not loans, merchant cash advances are typically unsecured, and amounts provided can range from a few thousand dollars up to the hundreds of thousands. There are also no fixed terms: Providers estimate the repayment rate based on the business’s sales history.

Disadvantages of a Merchant Cash Advance

As mentioned, MCAs are not technically considered loans. As a result, they are not subject to the same laws or federal regulations as traditional small business loans, which leaves more room for manipulation. MCAs are regulated by the Uniform Commercial Code as established by each state in the U.S., rather than federal banking laws such as The Truth in Lending Act.

Paying back a merchant cash advance can hinder your business’s cash flow, and it can be easy to get caught in a cycle of debt. Know all of your options before deciding on a financing option.

In addition, these types of transactions often cost more than a traditional SBA loan and are offered in smaller dollar amounts for short-term purposes. When calculated as an APR, merchant cash advances can range between 35% and 70%.

Before applying for and receiving a merchant cash advance, consider other ways to finance your business, such as taking out a small business loan or other sources of small business funding. No matter what, you’ll want to make sure it’s the right choice for your financial situation before moving forward.

Key Takeaways

  • A merchant cash advance is a type of short-term funding where a business gets a set amount of cash upfront from a financing provider, and then typically repays the money with a percentage of daily or weekly credit or debit card sales.
  • Merchant cash advances are unsecured and have no fixed terms, meaning that providers estimate the repayment rate based on the business’s sales history.
  • MCAs are not technically considered loans, which means they are not subject to the same laws or federal regulations as traditional small business loans, leaving more room for manipulation. 
  • While merchant cash advances can seem like an attractive option with their fast and easy approval process, they’re often recommended as a last resort of funding as they usually have high rates and fees and can draw predatory lenders.