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What Is a Merchant Cash Advance? The Complete Guide

Are you having trouble qualifying for a conventional business loan? If so, consider a merchant cash advance. 

What is a merchant cash advance?

It’s a predetermined sum that lenders give to you upfront. Technically, MCA loans aren’t loans because you’re offering a portion of your future revenue. Your business will pay back the advance through each credit card transaction. 

A repayment plan consists of a small percentage taken from each credit card transaction daily or weekly. The percentage depends on the terms and conditions of the advance. 

This article will provide an in-depth look into MCA funding. Let’s explore. 

How Does a Merchant Cash Advance Work?

The MCA process involves an agreement between a business owner and the lender. When both parties agree on the borrowing terms, the lender will transfer the funds to the business. The transfer process depends on the lender’s guidelines, but you’ll normally receive your money in as little as 48 hours. 

Upon transference, you’ll pay back the money within the terms of the advance. MCAs have no collateral requirements. Instead, credit card sales are sufficient collateral. Additionally, the lender will have direct access to your bank account.

Conventional business loans may come with collateral requirements. Collateral entails assets in the form of cars, houses, or stocks. If you fail to pay back the loan, you could lose your assets if you pledge them as collateral. 

The deducted percentage is holdback. If you make $15,000 a month in credit sales and have a withholding percentage of 10%, you’ll pay $1,500 a month in holdbacks until you pay back the loan. The typical withholding range is between 10 to 20%.

Conversely, the repayment balance will be more than you initially borrowed.

  • Example: If you borrowed $50,000, lenders may want you to pay back $55,000. Lenders will deduct the funds until you pay back $55,000. 

If you want to know the extra cost, look for the factor rate. The factor rate is a decimal rate you multiply by the loan balance. If you borrow $50,000 on a 1.18-factor rate, you’ll conduct the following calculation:

  • Example: $50,000 x 1.18 = $59,000

The typical factor rate ranges from 1.1 to 1.5. Overall, you could pay between 20 to 40% more than the original balance. You may pay higher than 40% in some cases.

How Do Lenders Structure MCA Loans?

Overall, you can borrow between $2,500 to $1 million. The borrowing amount depends on lending standards. Have a plan in place in case a lender gives you less than you anticipated. 

When it comes to payment periods, the amount largely depends on how much you borrow. On average, lenders give you a 12-month window to pay back the balance. On the low end, you’ll have three months and 24 months on the higher end. 

The lender may also allow you to choose daily or weekly withdrawals. Regardless, daily and weekly withdrawals are better than monthly payments.

With conventional loans, you must pay the monthly balance regardless of your income status. MCA provides a different option, allowing you to make payments based on your income level. 

How Do I Qualify for an MCA?

Most MCA companies allow you to apply online. In most cases, the application process takes five minutes or less, and you should receive a response within one or two business days. When applying, you’ll need three important documents: credit card statements, proof of ID, and business tax returns. 

The qualification measures depend on the lender. In general, you can obtain approval if you meet the following criteria:

  • Maintain credit sales of at least $2,500. Other lenders may require a higher minimum (i.e. $5,000)
  • Operate your business for a certain period (i.e. six-month minimum)
  • Have a credit score between 500 and 600

Lenders may also approve your application if you have a score lower than 500. With MCAs, lenders aren’t necessarily concerned about your credit profile.

Your credit card income is your best asset when applying for an MCA. On the other hand, conventional business loans require higher credit thresholds. Most business lenders prefer scores in the 600s. For more information on loan qualifications, check out this website

MCA lenders are also more lenient if you haven’t been in business long. For newer businesses, you can gain approval if you demonstrate at least two months of revenue. 

How Can I Find the Best MCA Deal?

To find the best deal, search for reputable lenders. Since the MCA industry is less regulated compared to other business loans, you may come across predatory lenders. 

You’ll spot a predatory lender when:

  • They charge hefty fees
  • They give you a higher amount than you asked for
  • They loan you money irrespective of your financial profile

If you have a lower credit score, don’t believe the notion that you must contend with high fees and high rates. You can still find a good deal with sub-par credit. 

How Can I Avoid Default? 

To avoid default, know how much you can afford to pay back. If you prefer a specific set of terms, you can negotiate with the lender.

Further, ask the lender about the total cost of the advance. Form there, divide the total cost by the desired number of months to see how much you can afford to pay.  

Merchant Cash Advance? Is It Right for Me? 

A merchant cash advance is a right choice if you need quick cash. Additionally, it’s a great choice if you cannot obtain funding from a bank or a credit union.

Merchant cash advance companies are more flexible than standard lenders. You can get funding with a lower credit score. However, research the lender’s reputation before applying, as the industry is rife with predatory lenders.

 Interested in reading more? Read more on our blog to learn about other business topics.