There’s a time in every business owner’s entrepreneurship journey when an unexpected expense arises or a golden opportunity presents itself, but unfortunately, the cash just isn’t there. It could be a sudden equipment failure or an unexpected tax bill or a chance to buy inventory at a discount. Whatever it might be, you need quick financing to fulfill a business need or obligation or seize the moment. 

A bank loan might be ideal, but sometimes, that’s just not possible for some businesses. If you’ve been in this situation, you might have looked up alternative financing options and come across this term: Merchant Cash Advance (MCA).

For small business owners, a merchant cash advance might be the most accessible funding option at the moment. However, they are frequently misunderstood. So, understanding MCAs and what exactly you’re signing up for when you get one is crucial because it might spell the difference between an MCA becoming the lifeline that your business needs or a debt trap you should avoid.

MCA Loan Definition

If this is the first time you’ve come across this term, you might be wondering “what is an MCA loan?” However, a merchant cash advance is not technically a loan. 

Legally speaking, an MCA is a commercial transaction that involves the purchase of future receivables. The way it typically works is you’ll get a lump sum of cash in exchange for a percentage of future card-based (credit and debit) sales. In other words, you’re selling a slice of your upcoming revenue to get much needed funds up front. 

Providers originally offered funds for businesses in the retail and hospitality sector, which generally have a steady stream of credit card sales. However, this has since expanded to include a wider range of businesses today. 

What are the Qualifications to Get an MCA Loan?

The no. 1 benefit of a merchant cash advance is its ability to offer quick access to cash. As such, it’s easier to qualify for an MCA than traditional loans. That is, there are fewer documentation and eligibility requirements. 

Another advantage of MCAs is the fact that providers often base their approval on a business’ revenue, not its credit history. And, even if a provider looks at your business’ credit history, it’s only a soft check or soft pull, which does not affect your credit score. 

In addition, MCAs don’t require collateral. However, some providers may require a personal guarantee. This means that if your business can’t repay, you’ll be personally liable to pay. 

• How Fast Can You Get Cash?

This depends on your provider, but you’ll receive your MCA funds faster than traditional options. Typically, funds arrive in your account within 24 to 48 hours, although with some providers, you might receive the funds within the same day.

• What is the Cost of Getting an MCA?

Because a merchant cash advance is not a loan, you’re not charged interest rates. Providers will instead charge you with a factor rate, e.g., 1.1x to 1.5x. 

• When converted to Annual Percentage Rate (APR), which is the total yearly cost of borrowing money, MCAs have a steep cost of borrowing. According to the Small Business Majority, a national small business advocacy organization in the country, “MCAs are probably the most expensive borrowing option, with APRs between 25% – 350%.” 

• Are There Other Fees to Watch Out For?

Aside from the factor rate, MCA providers typically charge high financing or borrowing fees, with rates of 50 to 100% or more. 

Origination fee	A common fee for other business loans, an origination fee is a percentage of the borrowed amount.
Underwriting fee	This covers the cost of reviewing your MCA application. It could either be a percentage of the borrowed amount, typically 2-5% of the advance amount, or a flat fee, and it is often deducted before funds are disbursed.
Administrative fee	This is a flat fee that covers the cost of processing, or maintaining the MCA agreement.
ACH program fees	This are monthly charges for ACH processing.
Early payoff penalties	These are additional costs for repaying before the expected term.
NSF fees	These are penalties for insufficient funds during a scheduled withdrawal.

It’s wise to take a look at your MCA agreement for fee disclosures and/or request an itemized total cost before signing. 

How Do You Pay for an MCA?

When it comes to repaying a merchant cash advance, providers use either of the following terms: 

• A percentage of credit/debit card sales. Most MCA providers use a holdback percentage, which is a fixed percentage of daily or weekly credit or debit card sales. This ranges from 10 to 20% of sales revenue. Because this is a percentage, the exact amount you’ll be paying varies with each repayment. This percentage is automatically deducted from your daily credit and debit card transactions before any revenue hits your bank account. 
• A fixed payment. Some MCA providers calculate a fixed monthly payment based on your estimated monthly sales. They deduct this amount through fixed withdrawals directly from your bank account daily or weekly via ACH transfer. However, on slow periods, providers may adjust this amount based on your revenue for the day or week. 

Payments are automatic. Your MCA provider will either coordinate with your payment processor or request for your authorization of their regular withdrawals from your business account. Repayment will only stop when your MCA provider has fully collected the total amount, which consists of the advance and fees.

How Long Do You Usually Pay for an MCA?

Repayment periods for a merchant cash advance depend entirely on your revenue, but they are generally short, typically 18 months or less. However, timelines will vary depending on sales volume, i.e., faster payoff when sales are high or extended payoff when sales are slow. 

Who Should Get MCAs?

A merchant cash advance is not fit for every business. MCAs are most suited for businesses with low credit but have consistent, high card sales, and they are ideal for immediate or urgent cash needs. Businesses with persistent cash flow problems should look elsewhere, though. 

Experts recommend them only as a last resort and advise that they should be accompanied by an exit strategy. While MCAs have the potential to move a business forward fast, when used out of urgency, they can trap a business in debt and this situation can quickly spiral out of control. 

Bottom line: Use only in emergencies or as a last resort, and use with extreme caution. If you can, it’s better to get funds elsewhere.