Merchant Cash Advance: A Full Guide

A merchant cash advance offers business owners a unique financing option. Simply put, It involves repaying the cash advance with a percentage of your credit card sales. Essentially, this means selling future income at a discount for immediate working capital.

Key Points

• Merchant cash advances offer relatively fast access to cash without a stringent credit score requirement. 
• Lenders that provide a merchant cash advance will consider your credit card receipts to determine how quickly you could repay the advance. 
• Although a quick option, this option is very expensive. The daily payments can crunch your cash flow. 

How Merchant Cash Advances Work

A merchant cash advance isn’t like a traditional loan product. Instead, merchant cash advance companies are purchasing a percentage of your sales.

When pursuing a merchant cash advance, you’ll find the following details outlined in the contract:

• Advance amount: Merchant cash advance lenders will indicate how much they are willing to provide upfront in the contract. 
• Payback amount: The payback amount includes a substantial fee added to the advance amount. Generally, the cost of a merchant cash advance is very steep. So, make sure that your business can afford the payback amount. 
• Holdback: After you agree to the advance, the holdback is a daily amount you must hold from your credit card transactions. Each day, the merchant cash advance company will expect to receive this amount for the duration of your repayment term. This amount might be a percentage of your debit and credit card sales or a fixed daily or weekly withdrawal from your business bank account.

The details of a merchant cash advance make it clear that this type of funding solution can get very expensive. Although expensive, many business owners still pursue this option due to the speed of funding with minimal credit requirements.

The advance is based on your sales. If your sales can support the daily holdback amount, then merchant cash advance funding can be a viable way to fund any major business costs quickly. 

Merchant Cash Advance Rates, Fees, and Terms

The rates, fees, and terms vary widely across merchant cash advance companies.

• Rates: Generally, you can expect to pay more for this type of funding because the payback amount is based on a factor rate instead of an annual percentage rate (APR). For this funding type, factors often range from 1.1 to 1.5.
• Factor rate determination: The factor rate will vary based on the merchant cash advance lender’s assessment of your business. An assessment will include a look at your industry, years of operation, business financial state, and debit and credit card transactions. A riskier business will receive higher factor rates. 
• Fees: In addition to the factor rate, you’ll have to pay any fees the company may charge. A few to look out for include administrative fees and application fees. 
• Terms: You can find merchant cash advance terms that range from three to 18 months. If you have higher credit card sales, you’ll be able to pay off the loan faster. 
• Funding speed: It’s possible to finalize a merchant cash advance in as little as 24 hours. But the exact speed will vary based on the lender you choose to work with. 

Calculate the Cost of a Merchant Cash Advance

When considering any funding type, understanding the exact costs is essential. Here’s an example to help you understand the costs.

Let’s say that you want to accept an advance of $50,000 at a factor rate of 1.2. That leads to a total repayment cost of $60,000. With that, you’d pay $10,000 in fees.

But the amount of credit card sales you make will dramatically impact your repayment timeline:

• If you are repaying the loan with 10% of your monthly credit card sales, which amount to $90,000, then you’d make daily payments of $300. You’d pay off the advance in around six months at that pace. 
• If your credit card sales dropped to $60,000 per month. With that drop, you’d make daily payments of $200. The slower pace would have you pay off the loan in 10 months. 

Pros and Cons of a Merchant Cash Advance 

Every financial decision comes with advantages and disadvantages. A business merchant cash advance is not an exception. 

Pros of a Merchant Cash Advance 

A merchant cash advance for small businesses comes with the following advantages:

• Fast funding: You can secure your advance in as little as 24 hours. If you need funds quickly, this is a useful option.
• Flexible repayment term: The repayment requirements are based on your credit card sales. If business is booming, you’ll be able to repay the loan faster. 
• Minimal credit score requirements: Merchant cash advance lenders may look at your credit score. But a bad credit score usually won’t preclude you from getting the advance. 
• No collateral required: The focus of the advance is your debit and credit card sales. With that, you won’t find any collateral requirements. 
• No limitations on usage: Once you have the funds in hand, you can use the funds however you see fit. There’s no penalty for using the funds for a legitimate business purpose. 

Cons of a Merchant Cash Advance 

Of course, there are also disadvantages to consider with a merchant cash advance. A few include:

• High interest rates: Merchant cash advances are usually much more expensive than other business funding options. 
• Negative impact on future cash flow: The daily or weekly repayment requirements will cut into your business cash flow. 
• No positive credit outcomes: Since a merchant cash advance is not technically a loan, the repayments won’t have a positive impact on your business credit profile. 
• Credit cards must represent a significant portion of your sales: The repayment of this advance relies on credit card sales, so your business must accept a large volume of credit card payments. 
• Credit card processor limitations: If you accept a cash advance, you might be stuck with an agreed-upon credit card processor for the duration of the loan. 

Is a Merchant Cash Advance Right for Your Business?

A merchant cash advance isn’t the right option for every business. Here’s when it makes the most sense:

• Immediate funding needs: Let’s say your business is facing a significant expense that you can’t cover without an influx of cash. The fast funding and minimal requirements of a merchant cash advance make it a viable option. 
• High volume of credit card sales: The basis of a merchant cash advance is your business’ credit card sales. If you have a high volume of credit card sales, this option is on the table. 
• Bad credit: A bad credit score won’t prevent you from getting a merchant cash advance. If your business meets the other merchant cash advance requirements.

If you have an excellent credit score and can wait a few weeks for funding, then a merchant cash advance won’t be the most efficient solution. Instead, you might want to pursue an unsecured small business loan with lower interest rates and fixed repayment terms. 

How to Apply for a Merchant Cash Advance

The application process for a merchant cash advance varies a bit based on the lender. But here’s what to expect:

• Apply online: Be prepared to provide information about your business. Specifically, you’ll need to provide details about your monthly credit card sales. You can provide this information through recent bank statements. 
• Answer questions: In some cases, the loan officer will have some questions about the financial situation of your business. 
• Obtain funding: If approved, you should receive your merchant cash advance quickly. Generally, you can expect these funds to arrive within a few days. 
• Start repayments: As soon as you accept the advance, you’ll start making repayments on a daily or weekly basis. Make sure that your business is prepared for this major financial commitment. 

FAQs about Merchant Cash Advances

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