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A merchant cash advance (MCA) is a type of financing that enables business owners to tap into their future credit and debit sales to access immediate funding. Borrowers must meet certain requirements for a merchant cash advance. These requirements can vary from lender to lender, though there are some basic criteria all lenders require. Generally, businesses need to have been in operation for at least six months and have a certain minimum of average monthly credit or debit sales.
- Merchant cash advances provide short-term financing to businesses in exchange for a percentage of their future credit/debit card receivables.
- Requirements for a merchant cash advance usually include a minimum time in business and a certain monthly sales volume.
- Other MCA conditions may include a credit check and a backlog of sales and tax data.
- Merchant cash advance providers look for companies with strong credit card sales and the ability to repay cash advances within a short period of time.
What Are the Requirements to Qualify for a Merchant Cash Advance (MCA)?
To qualify for a business cash advance, there are a few key requirements that must be met. Of course, they vary from lender to lender, but many of them require:
- A minimum yearly revenue of over $100,000.
- A healthy credit history, if possible, for the best rates.
- A minimum of six months in business.
- No bankruptcies in the recent past.
- Bank statements and tax documents readily available.
What You Need to Know About Merchant Cash Advances
A merchant cash advance is a popular way for many businesses to get access to the capital they need to cover expenses and fuel their business operations. This type of financing has many advantages, but as with any type of financing, there are important things to know before jumping in.
What Is a Merchant Cash Advance?
A merchant cash advance is a type of loan that allows you to get cash quickly in exchange for a portion of your future sales. Instead of making regular payments like you would with a traditional loan, you'll use a percentage of your future credit or debit card sales to repay the loan. This gives you more flexibility than a traditional loan and allows you to pay back the loan as your business grows.
How Does a Merchant Cash Advance Work?
MCAs provide businesses with lump sums of cash, typically in exchange for an agreed-upon percentage of the business's future credit card and/or debit card sales. This type of loan is a quick and easy way for a business to get quick access to cash without needing to go through arduous application processes like those associated with traditional bank loans.
Here’s how getting an MCA typically works:
- The lender advances a lump sum of cash to the business in exchange for a percentage of its future credit/debit card sales.
- The loan amount is typically based on the anticipated business revenue.
- The repayment process is handled on a daily or weekly basis, typically through the business’s existing merchant account.
- The repayment is based on the sales volume of the business which means that the payments can be adjusted if sales fall off.
- As the business makes sales and collects the payment, a percentage of those sales are automatically sent to the lender until the loan is repaid.
What Types of Businesses Qualify for Merchant Cash Advances?
Businesses of all sizes can qualify for an MCA, though some types of businesses may be eligible to receive a higher maximum loan amount than others. Eligible businesses typically include those in the service and retail industries, such as restaurants, retail stores, gas stations, and salons. Pretty much any business that accepts credit and debit card sales and makes a strong enough profit will qualify.
How Much Can a Business Get with an MCA?
Different lenders will offer different amounts, but businesses can typically receive an MCA for amounts ranging from just $5,000 all the way to up to a few million dollars, depending on their creditworthiness.
How Fast is the MCA Application/Approval/Disbursement Process?
The speed of the merchant cash advance (MCA) application, approval, and disbursement process varies based on the size and complexity of the loan request. However, the entire process can typically be a few days to a few weeks.
The MCA application can usually be filled out in minutes and submitted online. Once submitted, the lender will evaluate the request and review the required documents. This process can take anywhere from a few days to a week or more depending on the complexity of the loan request.
After the lender has approved the request, the disbursement process begins. The loan amount is usually deposited into the borrower’s account within a few business days.
How Much Does It Cost to Get a Merchant Cash Advance?
Getting an MCA can be an expensive endeavor and understanding the associated costs and fees is vitally important in making sure it is the best choice for your business.
The total cost of a merchant cash advance is determined by a number of factors, including the amount of the advance, its duration, and the business’s overall financial stability. These advances are typically offered with factor rates between 1.1 to 1.5.
To find the full cost of the MCA, you’ll take your factor rate (which should be explained to you in your MCA agreement) and multiply it by the loan amount. So, for a $50,000 loan with a factor rate of 1.2, that would look like:
$50,000 x 1.2 = $60,000
So, in total, you’d pay $60,000 in total to the lender, meaning you’d pay a whopping $10,000 in fees for the total loan. If that seems like a lot, it’s because it is. MCAs, due to their limited requirements, charge steep fees to borrowers.
What Are the Best Merchant Cash Advance Companies?
There are a host of MCA companies fighting for your business, all with different terms, credit options, and rates. Here are a few we recommend:
- Lendio: Lendio is a well-known lender that’s funded over 300,000 loans. They offer a wide range of loan amounts from $5,000 to $1 million and you can get funds in as little as 24 hours.
- Torro: Torro offers loan amounts that range from $5,000 to $750,000. Plus, they have an easy-to-use mobile experience that makes getting a loan a simple process.
- Fora Financial: Fora focuses on fast funding, often taking just 24 hours to get back to you with a decision. With loan amounts from $5,000 to $1.4 million and terms of up to 15 months, you have a wide range of options.
Pros and Cons of a Merchant Cash Advance?
Pros of Merchant Cash Advances
- Most businesses qualify. Qualifying for a merchant cash advance may be simpler than a traditional business loan due to being based on sales volume rather than credit history.
- Funding is typically fast. MCAs can be accessible in a swift manner compared to a standard startup loan, so you can have the needed funds in a timely manner.
- You don’t need collateral. Any business or personal assets will not be in jeopardy in the case of default, as no collateral or personal guarantee is required for a merchant cash advance.
Cons of Merchant Cash Advances
- Costs can add up. Merchant cash advances may be more expensive compared to traditional business loans due to higher interest rates and fees.
- MCAs have limited uses. Merchant cash advances are only suitable for short-term uses such as emergency repairs and business cash flow gaps, rather than for long-term investments.
- Repayment terms often fluctuate. Repayment terms may fluctuate based on credit card sales, which can make budgeting a challenge for businesses in their early stages.
How to Apply for a Merchant Cash Advance
Unlike many loan applications, the MCA application process isn’t terribly long. Here’s what the process will look like:
- Research lenders. Take the time to compare the best merchant cash advance companies. Research the terms, rates, and other perks offered by each company.
- See if you meet the requirements. Once you’ve narrowed down your list to a few lenders, figure out the exact requirements of those companies. These requirements may include reviewing your credit score, business income, tax returns, and more.
- Complete the full application. The application process usually consists of sending in business and financial documents like tax returns, profit-and-loss statements, and bank statements.
- Start repaying your loan. Once you get your MCA funds, you'll want to start making payments based on your repayment schedule. Luckily, you don’t have to do much here. The MCA lender will likely take automatic deductions from your credit card or bank account.
What to Do if You Don’t Meet the Merchant Cash Advance Requirements
If you don't meet the merchant cash advance requirements, then you, unfortunately, won’t be able to receive the cash advance. However, there are certain steps you can take to position yourself better for success.
- Review the merchant cash advance requirements and come up with a plan. Are there any areas where you could strengthen your business? What could you do to improve your cash flow? Could you expand your customer base? Up your credit?
- Reach out to the lender who denied your cash advance request and ask about other options. The lender may be able to suggest a different type of financing that better fits your needs.
- Look into alternative solutions. Alternative financing solutions, such as invoice factoring or crowdfunding, may fit your needs better (find a full list of alternatives below).
In the end, meeting the merchant cash advance requirements is only the first step in securing this type of financing. You may only be able to get the full benefit of a cash advance if your business is in a strong enough position to take advantage of it.
Alternative Funding Options to Merchant Cash Advances
MCAs aren’t always an option for every business. Maybe your business doesn’t rely heavily on credit or debit card sales. Or maybe you can’t find the terms you’re looking for. Either way, there are other funding options available, including:
- P2P Lending: Peer-to-peer (P2P) lending platforms help investors put their money towards your loans. These loans operate just like a traditional business loan but with a different type of underwriting.
- Crowdfunding: Crowdfunding sites allow you to collect money from your peers to fund your business ideas without debt or loans.
- Small Business Grants: National and local organizations, such as the SBA offer business grants to entrepreneurs, even some with poor credit.
- Angel Investors: Angel investors are often wealthy investors that provide funding in the early stages of the company, often in exchange for a stake in the company.
- Family or Friends: If all else fails, asking for loans from friends and family may be an option. Make sure to treat them like a lender and have a plan in place to pay back the debt.
Useful Resources for Businesses Looking for Financing
Getting the financing you need for your business can seem like an exhausting endeavor, but there are plenty of resources out there to help. Here are a few organizations that offer business owners help with financing:
- Small Business Administration (SBA): The SBA provides a wealth of educational materials and resources to help small businesses understand the ins and outs of merchant cash advances. Plus, they provide tons of financing options.
- Minority Business Development Agency (MBDA): The MBDA helps minority-owned businesses access capital and other resources.
- SCORE: SCORE is a nonprofit organization that provides free mentorship and advice to entrepreneurs who are looking to secure business financing..
- Angel Investment Network: The Angel Investment Network helps entrepreneurs connect with investors and secure the capital they need.
The merchant cash advance industry has grown significantly over recent years, providing business owners with an expedited alternative to traditional bank financing. Merchant cash advances offer a unique set of advantages; however, they come with their own set of requirements.
Overall, a merchant cash advance provides businesses with the opportunity to receive much-needed capital in exchange for a small percentage of their future sales. As long as a business has a short history of being in business and makes a significant amount in credit and/or debit card sales, it’ll likely qualify for an MCA.