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Merchant Cash Advance Financing Options

Get working capital now and use your future earnings to pay it off.

A merchant loan advance isn’t a loan at all. It’s a way to borrow against your future earnings. More commonly known as a Merchant Cash Advance (MCA), this type of financing is typically for those who cannot receive a bank loan. With an MCA, you get your money relatively quickly, and then you pay it back over the next several months through a portion of your credit card sales. 

Merchant Cash Advance at a Glance

The first question you should ask yourself before taking out a merchant cash advance is whether or not you’ll be able to pay it back with the added fees. Factor rates on merchant cash advances can be high. Here are the main points:

  • The maximum funding amount for a merchant cash advance will be determined by your provider.
  • Your merchant cash advance will have a factor rate instead of an interest rate. Your factor rate could be anywhere from 1.14 to 1.48 or higher.
  • The funding term for a merchant cash advance is a little different than with other types of funding. Since you are borrowing against your future earnings (and since you pay it back as you earn money) the term is determined by how long it takes you to earn enough money to pay back the funding and the fees. On average, this takes around eight to nine months.
Maximum Funding Amount

Up to $200,000

Funding Term

Usually around 9 months

%
Factor Rates

1.14 to 1.48

Time to Funds

As soon as 1 business day

Merchant Cash Advance Example

Let’s look at an example. If you borrowed $10,000 with a 1.20-factor rate, then you would need to pay back $12,000. The math is easy. You simply multiply the funding amount with the factor rate. That gives you the amount you will need to pay back. (You should know that there can be other fees involved as well, such as an origination fee and documentation fee.)

You’ll pay the MCA back using a percentage of your future credit card sales, usually around 10% to 20%.

Logo showing merchant cash advance icons.

A merchant cash advance typically has a higher cost than other kinds of small business funding options. This makes it a last resort for companies that need to fund a cash-flow gap.

Requirements

In order to apply for a merchant cash loan, you will need the following documentation:

  • Proof of identification (such as a state-issued ID)
  • Bank and credit card statements
  • Business tax returns

It is also important to know your credit score as well; the lender might run a credit check to see if you qualify for the advance. The amount you can get from a merchant cash advance ranges from a few thousand dollars to over $200,000. However, the payback period is usually around 18 months or less. Repayments come out of your merchant account and are calculated based on sales processed through credit or debit card sales.

Fees

When you talk about MCA fees, it can all get a little confusing. A few years ago, a New York Supreme Court Justice determined that an MCA is not a loan. The defendant said their MCA provider committed civil and criminal usury. But the judge ruled that because an MCA is not a loan, usury cannot exist.

The defendant argued that you could convert the outcome of the agreement into a usurious interest rate, but the judge said that this type of conversion requires “unwarranted speculation.”

Unwarranted or not, it’s a good idea to figure out your fees before signing on the dotted line.

Merchant Cash Advance Factor Rate

Rates on merchant cash payments vary from provider to provider and may be higher than other types of financing. Providers will check creditworthiness and credit history before determining your rate. Here are a few things to take note of:

  • The maximum loan amount for a merchant cash advance will be decided by your provider.
  • The factor rate of the advance may be anywhere from 1.14 to 1.48, and it could be potentially higher.
  • The funding term for a merchant cash loan is a bit different than other types of funding. The term depends on how long it will take you to pay back the loan, plus the additional fees. Generally, this takes about eight to nine months.

Your rate could vary depending on the provider you end up using, your credit and business history, the amount of money you are borrowing, and other variables.

Rates on merchant cash payments also vary from provider to provider and may be higher than other types of financing.

We should also point out that the factor rate is just one part of the equation. Your provider may add other fees on top of the factor rate.

Loan Term

The average funding term for an MCA is usually around nine months, but you should be able to guess your loan term without too much trouble. First, try and estimate your factor rate taking your credit history into account. Multiply that by your desired loan amount, and then look at your sales history to figure out how long it would take to pay that off with 10% to 20% of your credit card sales.

Let’s look at another example. If you needed to take out $50,000 and you had a factor rate of 1.48, then you’d need to pay back $74,000. Let’s say your business generated $40,000 a month in credit card sales. 15-percent of that would be $6,000. If you were paying back $6,000 a month, it would take a little over 12 months to pay back your MCA.

Approval Process

The approval process for an MCA is known for being much faster than other types of small business financing. In fact, from what we’ve heard, the bottleneck usually ends up being the merchant needing to send in the required documentation. So, you can speed up the process by having that ready as soon as possible.

Bad Credit or Limited Credit History

Business owners without an established credit history may have trouble qualifying for a bank loan. In some situations, it makes sense for these people to avoid taking on credit. When that’s not an option, an MCA can be a viable solution.

The main benefit of this type of funding is that it can be a way to get working capital when other financing options are not available.

The Risks

This type of funding is expensive. Before you take out an MCA, you need to know your business can survive on 80% of your credit card sales for the better part of a year. If it can’t (or even if it’s too close to tell for sure), then you shouldn’t get this type of funding.

The risk is that if you can’t survive on a fraction of your credit card sales, then you’ll eventually go out of business. If you’re worried that this might happen to you, then we recommend seeking out an SBA loan made for struggling businesses.

Main Advantages

Woman using a cash register at a store.

The main advantage of a merchant cash advance is that businesses with bad credit or a limited credit history still have a chance of being approved. Also, this type of funding generally doesn’t require collateral. You tend to get your merchant cash advance funds faster than you would with a different type of funding.

Disadvantages

You’ll likely pay more for a merchant cash advance than you’d pay for a different type of small business funding. This is because of the factoring fee and additional fees that may be stacked on top. The cost of getting a merchant cash advance is higher than other types of loans and funding. Costs are defined as factor rates, not interest rates. A factor rate is not tied to a specific time period. Also, if you pay off an advance more quickly, you won’t save money on interest.

The risk of an MCA is that a sum of your sales will go toward repaying the funds and other costs. This may cause cash flow issues, which could affect your business and cause you to go into more debt and have to borrow more money yet again.

Also, there’s bad news if you plan on using a merchant cash advance to build up your business or personal credit score – your merchant cash advance payments will not be reported to credit bureaus.

To summarize, here are the pros and cons of merchant cash advances:

Pros:

  • Quick money
  • Flexible credit score requirements
  • No collateral necessary
  • Easier to qualify
  • Flexible payments
  • Can be used for a wide variety of purposes

Cons:

  • Factor rates, not interest rates
  • There may be cash flow problems
  • You may need to change merchant processors

Merchant Cash Advance Companies

When looking for a merchant cash advance company, be sure to do your research to find the right fit for your business and its needs. There are many predatory lenders out there, so be aware of what is out there before you choose a company.

Listed below are a few well-known merchant cash advance companies:

1. RAPID FINANCE

They serve businesses that cannot qualify for bank loans and other types of loans. They provide cash advances, short-term loans, and other lines of credit if necessary. To meet the basic requirements, your business needs minimum of three months earning at least $5,000 per month in revenue. The advance amounts can go up to $1 million, with factor rates between 1.22 to 1.30. The larger the advance, the lower the rate might be.

2. CAN CAPITAL

CAN Capital frequently used for their short-term loans, but they also offer merchant cash advances. They offer between $2,500 to $250,000 with daily payments. Funding is provided in as little as two business days, and customers usually take about six to 18 months to repay the advance. You will need to be in business for at least six months, have $150,000 in gross revenue at minimum, and no more than $175,000 in tax liens and judgments. Factor rates range from 1.15 to 1.48. There is also a $595 fee for setting up your account.

3. PAYPAL WORKING CAPITAL

PayPal is a payment processing company that also provides businesses with merchant cash funding. It can give up to $200,000 for your first loan and can extend an advance that is equal to 35% of your sales. In order to qualify, customers must have at least $20,000 in annual PayPal sales, or at least $15,000 in sales if you have a Business PayPal account. Rates are as low as 1.01 and go upwards to 1.58. PayPal is certainly one of the more affordable options for many business owners.

In Conclusion

Because they are expensive, we hesitate to endorse merchant loan advances (which aren’t loans at all) for those looking for anything other than emergency cash. If you need the money fast, the factor rate ends up being reasonable, and you’re confident that you’ll be able to afford the agreement, then this could be the right option for you.

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