A guide about merchant cash advances and how they work

January 2022

Have you heard about revenue-based financing? A merchant cash advance, also known as an MCA or a business cash advance, is an advance of capital against a business's expected future revenue. A merchant cash advance is a financing alternative to a traditional small-business loan. With an MCA, a company gives you a lump sum of cash that you repay with a percentage of your debit and credit card sales plus a fee.

In this article, we will answer all your questions as a small business owner, so you can define whether a merchant cash advance is the right choice to grow your business. Keep reading and learn more about how a merchant cash advance works.

What is a Merchant Cash Advance?

A Merchant Cash Advance- also called an MCA, is a loan based on your business's future revenue. You pay this advance back with an automated withdrawal. The amount is set beforehand with a percentage of your daily bank balance (usually daily or weekly, but terms and qualifications can vary). Merchant cash advances are ideal for small businesses that require capital quickly to cover cash flow issues or short-term expenses. 

How does an MCA work?

Unlike other traditional business loans, merchant cash advances do not have standard repayment terms. The retrieval rate is the percentage of your sales that will be withdrawn automatically daily or weekly to pay back the merchant cash advance. The repayment rate can usually be between 5-15% of your earnings. You can choose the repayment period, but it is essential to consider that it will depend on the MCA amount. Additionally, these repayments should be done in 8- 9 months but can range from 3 to 18 months.

Two common ways to repay a merchant cash advance are the following:

  • A percentage of your business's debit/credit card sales.

  • Or fixed withdrawals from your business's bank account.

An MCA is usually structured by withdrawing a percentage of debit/credit card sales. In this case, the repayment terms are based on your business sales and can range from three to 18 months. The higher your business sales are, the faster you repay the advance. Let's see an example:

Let's say you agreed with your funder on the terms and set a percentage of your revenues. For example, if you repay daily at a fixed rate of 10%, and the day's revenues total $1,000, that day's repayment amount would be $100. 

Let's say that on another day, you had a revenue of only $100; Your repayment amount for that day would then be $10. Your business repayments are withdrawn automatically according to the MCA agreement terms until you pay back the advance and any associated fees and cost of capital.

What credit score do you need to qualify for an MCA?

An MCA can be an excellent opportunity for new and small businesses. A business owner doesn't have to have a great – or even good - credit history of being approved for a merchant cash advance. Even if you don't meet the strict requirements necessary to get approved for a traditional bank loan, you can apply for an MCA.

MCA fees and costs

MCA uses factor rates instead of annual percentage rates that credit cards and bank loans usually use. These factor rates are between 1.1 and 1.5 to represent the total amount repaid to the funder. We have provided a formula to determine how much it will cost to repay a merchant cash advance. To calculate the cost of your merchant cash advance, you can use the following formula:

Total payback amount= Advance received x factor rate 

For example, you get an advance of $25,000 with a 1.3-factor rate.

25,000 x 1.3 = 32,500

In that scenario, you would pay back $32,500. Of course, there may be additional fees, such as a processing or set-up fee. It's always essential to carefully check the terms of your merchant cash advance, just as you would for any business agreement.

Pros and cons of an MCA

All financing options have their cons and pros, but this will depend on your needs and those of your business. Firstly you need to be realistic about what you can afford to pay back and how much of an advance you should accept before you settle. Also, if you're looking to grow your business credit score, it can be negative if advance repayments are automatically deducted from your business account. A commercial advance is not a loan; therefore, it is not considered by the credit bureaus and does not increase your credit rating.

On the positive side, automatic repayments are tied to your daily earnings, which can make paying an advance easier, especially if your business has seasonal ups and downs.

How to get a MCA?

If we have answered all your questions and you are looking to access fast financing for your business, contact one of our specialists. At One Park Financial, we work with a network of financing sources. So, if you are a business owner looking to invest in your growth, have been in business for at least three months, and are already generating more than $7,500, you can check if you prequalify by filling out our online form. Start your process with us today!

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.