The Complete Guide To Merchant Cash Advances

January 2019

Wondering whether a merchant cash advance is a good way to get working capital for your business? The best way to determine that is by understanding what MCAs offer, how they work, and the advantages and challenges of this type of business funding.

What is a merchant cash advance?

Merchant cash advances provide a way for smaller businesses to access funding quickly, even if the business owner doesn’t have a great credit score. That’s because MCAs are not loans; they are an advance against a business’s future income. A business owner is essentially selling a percent of his or her future income in order to access funds now.

How does a merchant cash advance work?

The funder provides a lump sum advance on future revenues. Typically, that advance is then repaid from a set percentage of the merchant’s actual revenues. For example, if the set percentage is 10%, and the day’s revenues total $5000, then the repayment amount for that day is $500. On another day, when revenues are $1,500, the repayment amount would be $150. Repayments are automatically withdrawn daily until the advance and any associated fees and interest is paid back. There are some MCAs that can repaid via a fixed amount of the estimated monthly revenue, but the set percentage model is the most common.

What is a “ACH” merchant cash advance?

Typically, merchant cash advances were available to small businesses such as stores or restaurants that were paid primarily by credit or debit card. Funders were paid back directly from payment card receipts. MCAs can now be paid back by remitting the agreed upon percentage from a business bank account through ACH (Automated Clearing House) withdrawals. You no longer need to be a “merchant” to get a merchant cash advance.

What is a factor rate?

Unlike traditional business loans with annual percentage rates, MCAs use factor rates – usually between 1.1 to 1.5 - to represent the total amount that will be repaid to the advance provider. Multiply the advance amount by the factor rate to see the total repayment amount. As an example, an advance of $25,000 with a 1.3 factor rate would have a total repayment amount of $32,000.

What is a retrieval rate?

The percentage of daily receipts that will be used to pay back the advance. Average retrieval rates are between 5 and 15%, but can be higher.

What are the benefits of merchant cash advances?

For many small businesses, quick access to funding and easier qualification requirements are the biggest drivers of merchant cash advances.

According to the 2017 Small Business Credit Survey (SBCS) by Federal Reserve Banks, 79% of those who applied for a merchant cash advance were approved, as opposed to 62% of the applicants for a business loan. Additionally, the SBCS report found that the chances of being approved for an MCA by an online lender were significantly higher than gaining a loan approval from a bank or credit union. And while money from a bank loan may not be available for a month or more, according to a study by Harvard Business School, MCA funds are typically deposited into the business owners account within 72 hours.

Since an MCA is repaid via a percentage of the day’s actual receipts, payment amounts align with the business cycle – less during slow periods, more during high-volume times. Traditional loans have fixed payment rates, which may be difficult to pay during slower business cycles. Note that there’s no benefit to early repayment of an MCA, as fees are fixed.

What are the drawbacks of merchant cash advances?

The biggest challenge is that merchant cash advances have higher fees and interest rates than typical bank loans.

And, a business owner who is used to juggling accounts payables may struggle with the fact that it’s impossible to delay an MCA payment, as the repayment funds automatically goes directly to the MCA provider. Others see this as one less thing to worry about. Additionally, an MCA does not build your business credit rating, as it is not reported to credit bureaus.

It can also be hard to understand an MCA contact, even for those who are familiar with standard financing terminology. Understanding how the loan is paid back, what the percentage of sales amounts to in real money, factor rates and the total amount that is actually owed (receipts purchased amount) is critical. For help in crunching the numbers and understanding your options, you can turn to One Park Financial’s funding experts. One Park Financial works with a network of funding sources, and the company’s small business experts will help guide you through the funding process. Visit or call 855.218.8819 for more information.