Term Business Loan

The AFN Guide to Merchant Cash Advance

As a business owner, you know that sometimes the monthly sales receipts don’t come in fast enough to cover your day-to-day expenses. A merchant cash advance, or MCA for short, is a business financing solution that can help you close the gap. Keep reading for everything you need to know about using a merchant cash advance to fund your business.

What is a merchant cash advance?

A merchant cash advance allows a business owner to receive a cash advance against their future monthly sales. Unlike a business loan, where the finance company will typically seek physical collateral, a merchant cash advance gives you an immediate injection of cash that is secured by the sales that you expect to receive in the near future.

How does a merchant cash advance work?

A merchant cash advance requires an agreement between you and a merchant cah advance provider. This agreement outlines three things:

  • The advance amount is how much money the finance company will advance to you upfront.
  • The payback amount is how much you will have to repay. It’s higher than the advance amount, so it’s effectively like paying interest. The payback amount is often expressed as a factor rate. For example, a factor rate of 1.3 means you have to repay the advance amount plus 30%.
  • The holdback is the amount that the merchant cash advance provider will debit from your account daily or weekly until the entire payback amount is settled. This may be based on a percentage of your sales, and there might be a minimum dollar amount required each period. In some cases, the provider will have access to your merchant account in order to take these deductions directly.

Merchant Cash Advance Example

Bob’s Barbell Gym needs a $20,000 merchant cash advance to replace some equipment. Bob agrees to a factor rate of 1.3, meaning that he will have to pay back the $20,000 advance plus 30%. That works out to a payback of $26,000. He also agrees to a holdback of 20% of sales, subject to a $3,000 monthly minimum. Since Bob has $18,000 of average monthly sales, he will usually repay about $3,600 per month. At that rate, it will take him just over seven months to fully pay back the advance.

Is my business a good fit for a merchant cash advance?

One of the main considerations when trying to decide between a term loan and a line of credit is how much money you need and when. With a business term loan, the lender provides you with the full amount of the loan right away and payments begin immediately. With a line of credit, you can draw money when you need it, and only make payments on the amount you have drawn, which can lead to lower interest costs over time.

Here’s a comparison of a term loan versus a line of credit:

Phil’s Physio took out a business term loan for $20,000. Phil signed a loan agreement saying that he would pay the loan back over 12 months at 16% interest. After making 52 weekly payments, Phil paid off the loan, and his total interest cost was roughly $1,659.

If fast access to funding is a priority and your business has predictable monthly sales, an MCA could be right for you. Many business owners appreciate that an MCA can often be obtained quickly without the need for a strong credit score or having to provide collateral like real estate or other property. The main downside of an MCA is a higher cost of borrowing compared to some other funding options.

What can a merchant cash advance be used for?

While there are no restrictions on how you spend the money from a merchant cash advance, the relatively high cost of borrowing makes it ideal for projects that will be shorter-term in nature. For example, you could use an MCA to acquire or repair important equipment, restock fast-moving inventory, take advantage of a time-sensitive marketing opportunity, hire a key person, or cover a last-minute expense.

How do I qualify for a merchant cash advance?

The most important qualification for a merchant cash advance is a history of sales revenue.

The merchant cash advance provider will look at the longevity, amount and predictability of your revenue to determine how much they are willing to advance, how much you will be required to repay, and what holdback amount they will deduct from your daily or weekly sales.

In order to apply, you’ll likely need at least three months of transaction data from your merchant accounts and/or business bank accounts. You will also need to consent to a credit check and might be asked to provide personal tax returns.

Can I qualify for a merchant cash advance with bad credit?

Yes, you may still be able to qualify for a merchant cash advance even if you have bad credit.

This is because the repayment of the advance is secured primarily by the future credit card receipts or other sales receipts of your business rather than by your personal credit. The finance company will generally debit your merchant account or business bank account on a daily or weekly basis until the advance is repaid.

How do I apply for a merchant cash advance?

One of the great things about a merchant cash advance is how quickly you can apply and receive funding. Not every provider is the same, but at Advance Funds Network, we often provide funding within just a few business days. 

Here are the typical steps to apply for an MCA:

  • Application. You’ll be asked to provide a social insurance number, your CRA business number, and basic information about your business. You’ll typically need to show at least three months of bank statements and merchant account statements, and consent to a personal credit check. Depending how much you are borrowing, you may also be asked to show three years of tax returns.
  1. Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider. You’ll need to accept the terms of the advance, including the amount, the payback, the holdback, and when repayment will begin.

Funding. Your merchant cash advance will be deposited to your business bank account. Depending on the terms of your arrangement, you may be required to switch to a new credit card processing machine in order to facilitate the holdback.

Merchant Cash Advance Guide

What are the advantages of a merchant cash advance?

A merchant cash advance can be one of the fastest and easiest ways to fund your business. Here are some of the main advantages:

  • Fast funding. If you qualify, you can expect to receive funds within a few business days.
  • Simple repayment. Repayment is automatically debited on a daily or weekly basis.
  • Easy to qualify. As long as you have a track record of sales, you can potentially qualify.
  • No restrictions. Unlike certain types of credit, there are no restrictions on how you choose to spend the advance. 

No collateral. An MCA is a cash advance that is secured by your future sales, not a loan that requires you to pledge your home or other assets as collateral. 

What are the disadvantages of a merchant cash advance?

Despite its speed and ease, a merchant cash advance is not without its drawbacks. Here are some of the main disadvantages:

  • Higher cost of borrowing. Compared to some types of business funding, the cost of an MCA can work out to a higher annual percentage rate (APR) of interest.
  • Less cash flow control. With an MCA, a holdback is automatically deducted from your sales daily or weekly, so you can’t decide to defer or skip a payment. You will also generally have to repay the advance within 12 months.
  • Doesn’t build credit. Because an MCA is technically not a loan, having one will not help you build a better credit score.

Not available to all. Businesses that do not have a flow of credit card receipts or similar revenue stream will not be able to access an MCA.

What are some alternatives to a merchant cash advance?

As a business owner, you have many financing options, and some of them might be a better fit for you than a merchant cash advance, such as a secured business loan, an unsecured business loan, a line of credit, a credit card, or government financing sources, such as the CEBA loan program. Here are some of the main alternatives to consider:

Secured business loan

A secured business loan could be a lower-cost alternative to an MCA, however collateral will be required. The assets you pledge as security for the loan could be things like real estate, vehicles or equipment. The loan application process can be complex and time-consuming compared to an MCA, and your personal credit will be one of the main criteria used by the lender.

Line of credit

One advantage with a line of credit is that you are only required to pay interest on the amount that you actually use, unlike a business term loan, which will require you to take the full amount of the loan upfront. This can help you save interest and give you more flexibility with your cash flow.

Business credit card

A business credit card can be very flexible, as you are free to spend up to your limit without the need for approvals. However, the limit may not be enough for your business funding needs and the rate of interest will generally be high. A business credit card can be handy, but it may not be sufficient to replace a business term loan or other forms of funding.

How can Advance Funds Network help with a merchant cash advance?

Advance Funds Network is your gateway to business funding solutions of all kinds. If your business has been running for at least three months and has sales of $15,000 or more per month, you could qualify for an MCA. But why wonder? Apply online in minutes and you’ll hear from us soon with the best available funding options. You can also connect with a dedicated Financial Advisor now at (866) 480-2611.

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