How does a merchant cash advance work?

January 2022

You have probably heard much about Merchant Cash Advances or MCA. But, what is an MCA, and more importantly, how does it work?

A merchant cash advance (also known as a business cash advance) isn't a traditional business loan but an advance against a business's expected future revenue. For this reason, an MCA provides advantages and drawbacks different than those of a business loan.

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

What is a merchant cash advance?

We can define a merchant cash advance as an easy way for smaller businesses – especially those whose owners don't have a perfect credit history - to get funds faster. As we mentioned, an MCA is a loan based on the future revue of your business. 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).

Do I need an excellent credit score to qualify for an MCA?

The answer is no. 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 business 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.

How do you pay back merchant cash advances?

To pay back your MCA, you need to agree with the funder on the terms and set a percentage of your revenues that will be automatically withdrawn from your business bank account. For example, if you repay daily at a fixed rate of 10%, and the day's revenues total $1000, that day's repayment amount would be $100. Let's say that on another day, you had revenue of $100; the repayment amount would then be $10. Repayments are automatically withdrawn according to the business cash advance agreement terms until the advance, and any associated fees and cost of capital are paid back.

Do I have to accept credit cards to get a merchant cash advance?

Many business cash advances can be paid back by remitting the agreed-upon percentage directly from a business bank account through ACH (Automated Clearing House) withdrawals. This means you don't need to be a "merchant" to get a merchant cash advance.

What is a merchant cash advance factor rate?

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 you with a formula so you can find out how much it will cost to repay a business cash advance. All you have to do is multiply the advance amount by the factor rate, like so:

Advance amount x factor rate = Total payback amount.

For example, say 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 important that you check the terms of your merchant cash advance carefully, just as you would for any business agreement.

What is the retrieval rate in a merchant cash advance?

The retrieval rate is the percentage of your sales that will be withdrawn daily or weekly to pay back the business cash advance, which can usually be between 5-15% of your earnings. You can choose the repayment period, but it is important to consider that it will depend on the cash advance amount. Additionally, these repayments should be done in a time frame of 8- 9 months but can range from 3 months to 18 months.

What are the drawbacks to merchant cash advances?

All funding options depending on your needs. In this case, it is essential to be realistic about what you can afford to pay back and how much advance you should accept because it can be a negative for you to automatically withdraw the repayments from your business account. This means that a merchant advance does not build your credit rating, as it is not a loan and therefore is not reported to credit bureaus, so you have to consider it. Since repayments are tied to your daily revenues, it is often easier to repay a business cash advance, especially if your business has seasonal highs and lows.

For help in further understanding your options, you can turn to our funding experts. One Park Financial works with a network of funding sources and advocates for small business owners, helping to guide you through the funding process and explain your options. Get prequalified in a few minutes, or talk with one of our funding experts!