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Why Would a Small Business Apply for a Merchant Cash Advance?

If your business needs cash quickly and has a readily ascertainable history of credit card receipts, the Merchant Cash Advance ("MCA") product may provide the funding you require.

Pre-Qualify for a MCA Loan

What is a Merchant Cash Advance?

A Merchant Cash Advance (MCA) facility can provide business borrowers with an upfront fixed amount of cash. The funding amount is based upon a percentage of the businesses credit card receivables using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met.

The MCA is not technically a small business loan, but rather an advance on credit card sales. MCA's are not limited in what rates they charge and what terms they establish. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business.

Is Your Business Eligible for Merchant Cash Advance?

Merchant Cash Advances are available for most businesses that have regular credit and debit card sales. The most popular industries include restaurants, convenience stores (c-stores), gas stations, hotels and many other retail and service business. Depending on the provider there may be a minimum amount of historical credit card receivables required as well as a minimum length of time in business. Typically no traditional collateral such as machinery and equipment, real estate or inventory is necessary to secure a cash advance however some providers may look to take a lien on business assets. The personal credit of the business owners is not factored as heavily as it would be for traditional loans. Many MCA providers will allow credit scores well below 600. However, depending on the provider a personal guarantee may be required from the business owners.

Merchant Cash Advance Rates and Terms

The discount rate or fee charged to the business can vary drastically from provider to provider and greatly exceed the in Annual Percentage Rate (APR) charged for traditional business loans and SBA loans. Providers typically quote the interest rate on a monthly basis which would be between 5% to 17%. This monthly rate is then charged to the amount of funding that is outstanding to the business.

The collection of the funds may vary as well and providers may collect their share on a daily, weekly or monthly basis. There are typically three repayment methods used by advance providers which are outlined as follows:

  • Split Withholding is the most common where the credit card company will split the sales between the business and finance company per an agreed portion.
  • Lock Box or Trust Bank Account Withholding is where all credit card sales are deposited into a bank account controlled by the MCA provider and then a portion is forwarded on to the business after an agreed amount plus fees go to the provider.
  • ACH Withholding is where the finance company receives credit card processing information and deducts its portion directly from the business’s checking account via ACH.

The Advantages of Merchant Cash Advance

The biggest advantage to MCA is the speed at which providers can fund the advance. Many providers market that they can fund within 48 hours, but businesses should set realistic expectations of a week to two weeks before they see the cash. The speed of the funding can allow a business to react quickly if there is a specific funding need. It may be an equipment purchase, increasing staff, inventory purchase or repairs needed. The underwriting process is expedited because many of the items that traditional banks and lenders review are not required for MCA.

Repeat funding is also prevalent in the MCA world. Once a business repays their advance or if the business can show that they can support an additional advance MCA's can issue new funds at larger amounts if the businesses sales have increased and can support the additional funds.

Applying for a Merchant Cash Advance

The process of applying for a merchant cash advance is generally much simpler than for most other types of financing. Providers usually require a short application as well as submission of bank statements and statements from the credit card processor that the business uses.

How do I find the best Merchant Cash Advance Companies?

A decade ago there were only about ten (10) merchant cash companies in existence. Today there are approximately fifty (50). There is wide variation between the pricing and terms across MCA providers so it is very important to compare and contrast. BoeFly presents your application to MCA providers based on the information that you provide to us which helps connect you with the right provider. You will then work directly with the provider so you can negotiate your terms, rates and fees with them. To start the process of finding an MCA provider or business loan provider please click here.