Merchant Cash Advance: The Small

Business Owner’s Guide

A merchant cash advance (MCA) is a lump sum cash payment given to a
company in exchange for a fixed percentage of its daily revenue. Merchant cash
advances are short-term financing options characterized by terms under 18
months and daily payments equal to a percentage of a company’s total daily
revenue. Merchant cash advances are not considered loans but are rather the
sale of a company’s future sales.

Merchant cash advances have a relatively high cost of capital and are often used
as a last resort for working capital needs. They also have flexible, revenue-based
repayment schedules which can be appealing to small businesses with large
swings in sales. Most small businesses will prefer a short-term loan since they’re
often more affordable, have an easy online application process, and can provide
same-day funding.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a cash advance given in return for a
percentage of a business’s daily revenue. Merchant cash advance providers
charge a cost of capital equal to a cost of capital between 1.1x – 1.4x of the
amount advanced. This results in a cost of capital that’s much higher when
compared to other fast business loans.

MCAs are issued by merchant cash advance providers and businesses can
apply if they have been in business for at least 6 months have $15,000 in
deposits into their business checking account.

Merchant cash advances are used by businesses to cover the following:

• Short-Term Financing Needs

• Working Capital
• Cash Flow
• and can also be used for almost any purpose

MCAs are a quick funding option and businesses can receive the lump sum
payment in as little as 2 – 5 days. However, merchant cash advance providers
typically require that a business has the following qualifications prior to issuing a
merchant cash advance (MCA):

• a minimum of 6 months in business

• $15,000 in average monthly deposits into a business checking account
• 500+ Personal FICO Score
• Not currently in Bankruptcy (person or business)
• any Tax Liens or Judgments must be on a payment plan

This is because a merchant cash advance provider wants to evaluate risk and
assess the credit criteria of a business and its owners. MCA providers typically
look at a company’s daily receivables or daily credit card receipts to better
understand if the business will be able to pay back the advance in a timely
manner.

MCA providers usually like to see a target dollar amount that a business does in
monthly revenue prior to issuing a merchant cash advance. The exact target
varies by providers and is unique to the amount a business needs to borrow.
However, all merchant cash advance providers want to ensure they’ll be repaid in
a timely manner, typically within 8 – 18 months.

Merchant cash advances are considered a costly loan option and are used by
seasonal businesses or used as a last resort for companies that can’t find
funding elsewhere or that don’t have good credit. The approval process typically
takes between 1 – 2 days. Once approved, merchant cash advance providers
charge a factor rate (discussed below) and take a percentage of a business’s
daily sales, known as the “holdback percentage.”

Who is a Merchant Cash Advance Right

For?
Merchant cash advances (MCA) are an expensive option for business financing.
This is why MCAs are used by the following types of companies:

• Those that cannot find other short-term financing

• Those in need of quick financing, relative to conventional working capital
loans
• Those that don’t meet the qualifications of a more stringent loan option,
like SBA express loans
“Merchant Cash Advances can be a good option when a business needs funds
fast, the business owner has fair to average credit and can’t qualify for a
traditional loan, or if a business doesn’t have several years in operation because
most banks will require at least 2 years in business for a loan. The overall speed
of the advance is typically the most important.” ~ Angelo Mendola, the Chief
Operating Officer of Priority Payments

However, remember that there’s less federal regulation around merchant cash
advances and you might encounter some predatory lending practices. It’s
important to check the reputability of any merchant cash advance provider.
However, merchant cash advances are still advantageous for companies who
need to fund the following:

• Short-term financing needs

• Working capital requirements

“A merchant cash advance is a great source of working capital financing for

seasonal businesses. Since repayments are made as a percentage of a
company’s daily credit card receipts, seasonal businesses aren’t put into financial
distress like with a fixed-term loan.

Instead, the amount of repayment is tied to the success of the business. So, in
slower months, seasonal businesses repay comparatively less than in busier
months, helping a business with a quick cash advance and as well as with
favorable repayment terms.” ~ Ryan Rossett, the co-CEO of Credibly

Still, many businesses fall into the trap of a never-ending cycle of merchant cash
advances. For example, a company might use an MCA to pay off an existing
debt, only to find that the MCA repayment is more expensive. When this
happens, companies are sometimes forced to take out another MCA to pay off
the first one, subsisting the cycle indefinitely.

When applying for a merchant cash advance to fund your short-term needs, it’s
important to ensure that you’ll be able to make full repayment in a timely manner.

How Does a Merchant Cash Advance

Work?
During the application process, a merchant cash advance provider assesses the
credit of the business owner as well as the monthly credit card transactions and
total revenue of the business. If approved, the MCA provider issues a lump sum
amount within 2 – 5 days of applying. The average cash advance is typically
between $10,000 – $1,000,000.

Repayment terms are based on what’s called an MCA’s “factor rate.” The factor
rate is the multiple that a business will have to repay over the life of the advance.
For example, the average factor rate of a merchant cash advance is typically
equal to:

1.1 – 1.4 Average Factor Rate

This means that for every dollar advanced, a business will have to repay $1.20 –
$1.40 over the life of the advance. So, if a company receives a lump sum
payment of $10,000, and if the factor rate is 1.2, the business will have to pay the
MCA provider a total of:

($10,000) x (1.2) = $12,000

Once the lump sum is issued, merchant cash advance providers take a daily
percentage of the business’s revenue for repayment. This happens daily until the
factor rate is paid in full. The typical merchant cash advance is repaid within the
following timeframe:

12 – 24 months

The more daily credit card transactions a business does the quicker the MCA is
repaid. Conversely, the lower the daily credit card transactions the longer it takes
to repay. This means that the merchant cash advance repayment is relative to a
business’s cash flow.

Merchant Cash Advance: Costs, Terms, &

Qualifications
Average Lump Sum Amount $10,000 - $1,000,000
 Average Factor Rate 1.2 - 1.5

Average Annual Percentage 80% - 120%

Yield (APR)

Average Time to Funding 2 - 5 Days

Average Repayment Term 12 - 24 Months

Qualifications for Approval • a minimum of 6 months in business

• $15,000 in average monthly deposits into a business
checking account
• 500+ Personal FICO Score
• Not currently in Bankruptcy (person or business)
• any Tax Liens or Judgments must be on a payment
plan

1. Merchant Cash Advance Costs

The costs of a merchant cash advance (MCA) are largely dependent on the
following factors:

• Lump sum amount ($10,000 – $1,000,000)

• Factor rate (1.2 – 1.4)
• Repayment Term

The average lump sum financing amount of an MCA is typically between $10,000
– $1,000,000. When applying for an MCA, the MCA provider approves the
business for a maximum lump sum amount based on:

• The business owner’s credit score

• The business’s average monthly deposits into their Business Checking
Account
Merchant cash advance providers typically want to ensure that a business has
the daily revenue volume to repay a merchant cash advance in a timely manner.
Depending on the size of the lump sum, the MCA provider also issues a factor
rate. The lower the lump sum the higher the factor rate, and vice versa.

The factor rate is the total amount a business will have to repay the MCA
provider. The average factor rate is between 1.2 – 1.4.

For example, if a company receives a lump sum payment of $10,000 and has a
factor rate of 1.4, the business will pay the MCA provider $14,000 over the life of
the advance. The cost of capital in this scenario is 40%.

Typical annual percentage yield (APRs) on a merchant cash advance are

typically between 80% – 120%. However, the most important cost of an MCA is
the factor rate, since it represents the advance’s total cost of capital.

Some merchant cash advance providers also issue set-up or advance fees.
These fees can sometimes reach as much as 5%. It’s important to understand
any hidden fees that a merchant cash advance provider might charge prior to
applying.

2. Merchant Cash Advance Terms

The average time to advance approval is typically around 24 hours. The average
time to receiving the advance is usually between 2 – 5 days. This makes a
merchant cash advance a quick financing option for businesses in need of cash.

However, the total time to repayment for a merchant cash advance (MCA) is
variable and is typically between 8 – 18 months.

3. Merchant Cash Advance Qualifications

Merchant cash advance providers have relatively low qualifications when
compared to conventional loans and sometimes even alternative loans.
Specifically, businesses should expect to have the following when applying for a
merchant cash advance (MCA):

• a minimum of 6 months in business

• $15,000 in average monthly deposits into a business checking account
• 500+ Personal FICO Score
 • Not currently in Bankruptcy (person or business)
• any Tax Liens or Judgments must be on a payment plan
• Credit card processor account

MCA providers want to ensure that a business has adequate daily revenue prior
to issuing an MCA. This is why MCA providers typically want to see more than
$15,000 in monthly sales and at least 6 months in business. This helps reduce
their risk of default or their risk of an elongated repayment period.

Further, MCA providers will want to check the personal credit score of the
business owner. Remember that a merchant cash advance is not a loan and it
won’t show up on the owner’s credit report. However, the business owner is fully
liable for the company’s MCA repayment.

Where Do You Get a Merchant Cash

Advance?
Merchant cash advances (MCA) are issued by merchant cash advance
providers.

When looking for a MCA, it’s important to assess all your advance options, of
which there are many. There is currently an estimated $3 billion in MCA funding
among small businesses.

When assessing potential MCA providers, it’s important to consider the following:

• Maximum lump sum amount

• Factor rate
• Repayment period
• Set-up fees, if any

The maximum lump sum amount affects your factor rate. Your factor rate
represents the total cost of capital. Therefore, you need to ensure that you’ll be
able to pay back the original lump sum amount plus the cost of capital.

The repayment period is also important because it affects your daily payment.
The shorter the repayment term, the more a merchant cash advance provider
takes out of your daily cash flow.
Finally, some MCA providers charge hidden fees, such as set-up fees and / or
advance fees. These hidden fees can total as much as 5% or more. It’s important
to understand the full amount of fees prior to applying with an MCA provider.

Let’s now take a quick look at a typical merchant cash advance application.

Merchant Cash Advance Application

Process
The merchant cash advance (MCA) application process is fairly straight forward
and can be filled out online. The typical application is as short as 1 – 2 pages.
When applying for an MCA, businesses should expect the following six steps:

Let’s take a look at each of these six steps in-depth.

1. Fill Out Online Application

The initial application process is typically a 1- to 2-page form that can be found
on a merchant cash advance provider’s website. As part of the application,
business owners are required to submit the following:

• Social security number

 • Business tax ID
• General information about the business

This online application is used to assess the high-level suitability of a company.

Once the application is filled out and reviewed by an MCA provider, the provider
will reach out and ask for more specific documentation.

2. Provide Additional Documentation

If the initial online application looks good, the merchant cash advance provider
will contact you to provide additional documentation. This usually occurs within
24 hours of the submission of the online application.

Specifically, business owners should expect to provide:

• 3+ months of business bank statements

• Copy of their driver’s license
• Copy of a VOIDED check

This additional documentation is used to ensure that a company has at least

$15,000 in average monthly sales as well as the cash flow needed to repay a
merchant cash advance. As long as a business meets the minimum monthly
revenue requirements, has adequate cash flow, and has 6+ months in business,
an MCA provider will most likely approve the MCA.

3. Get Approved for a Merchant Cash Advance

Based on the personal and business information provided in the first two steps, a
merchant cash advance provider will approve a merchant cash advance (MCA).
As part of this approval, the MCA provider gives a business its:

• Maximum lump sum amount

• Factor rate
• Repayment term

The approval is nonbinding and gives a business owner the information he or she
needs to accept or deny the MCA.

For example, if the maximum lump sum amount is too low, the factor rate too
high, or the repayment period is too short, a business owner might decline the
MCA. If, however, the opposite is true, or if the financing needs are great
enough, a business owner will accept the terms given to him or her by the MCA
provider.

If accepted by the business owner, the approval time can take as little as 24
hours.

4. Receive the Lump Sum Cash Advance

Once the terms are agreed upon, the company is ready to receive the cash
advance and pay the merchant cash advance provider daily. The initial cash is
deposited directly into a business’s bank account.

Payments then come directly out of the company’s business checking account,
and go directly to the MCA provider.

Alternatives to Merchant Cash Advances

Of course, merchant cash advances aren’t a business’s only short-term financing
options. There are other available funding options that help with short-term
liquidity needs, including:

• Business Loans & Business Lines of Credit

• Accounts Receivable Financing

Let’s take a look at each option in a little more depth.

1. Business Loans & Business Lines of Credit

Small business loans & business lines of credit are more traditional ways to
obtain short-term financing. These financing options provide up-front cash in
return for flat monthly payments consisting of principal and interest.

There is no factor with a small business loan or business line of credit. Instead,
business lenders charge a monthly interest rate based on a business’s
qualifications and loan amount. Qualifications for a business loan or business line
of credit are more stringent than a merchant cash advance. Lenders typically
base loan approval on the following:

• Business’s financial performance

 • Business’s credit score
• Business owner’s personal credit score

Average interest rates can range from 7% – 98% and the maximum loan amount
can be anywhere from $10,000 to $500,000 or more. The total time to repayment
typically takes anywhere from 3 months to 3 years, depending on the lender.

Specific small business lenders include:

• OnDeck – OnDeck is a small business lender that offers term loans up to

$500,000 and lines of credit up to $100,000. Interest rates can range
anywhere from 7% – 98% or more, but OnDeck have average interest
rates between 7% – 13.99%. Payments are made monthly and loan terms
are between 3 months – 36 months.
• Kabbage – Kabbage is another small business lender that offers small
business loans and lines of credit up to $150,000. The lender charges
1.5% – 10% in interest and requires that all loans be repaid within 6 – 12
months. Funding can happen in as fast as 1 business day.

2. Accounts Receivable Financing

Accounts receivable financing is another traditional way to receive short-term
business financing. Accounts receivable financing is a loan option where
businesses use their accounts receivable as collateral.

Accounts receivable financing companies advance between 70% – 100% of a

business’s accounts receivable and then collects the outstanding invoices for a
small fee. The fee is generally around 0.5% weekly.

Accounts receivable financing companies typically base their qualifications on the

amount of a business’s outstanding accounts receivable. The best AR financing
companies can get you funded in about 1 business day.

Specific factoring companies include:

• BlueVine – BlueVine offers invoice factoring amounts between $20,000 –

$500,000. The lender charges a factor rate between 0.4% – 1.0% and its
application is 100% online. Businesses can expect to receive financing in
as little as a day.
 • FundBox – FundBox offers invoice factoring up to 100% of a company’s
outstanding invoices. Fundbox has a maximum loan amount of $100,000
and has a factor rate of 0.5%. Loan terms are for a 12-week period.

Bottom Line
A merchant cash advances (MCA) is a cash advance given to a company in
return for a percentage of its daily credit card receipts. MCAs can typically fund
between $10,000 – $1,000,000 and an MCA provider can take between 8% –
30% of a company’s daily revenue. These daily payments come directly out of
the company’s business bank account.

While the financing is fast, merchant cash advances are also costly. Merchant
cash advance providers charge a factor rate. This factor rate results in a cost of
capital between 20% – 40%. Based on the factor rate, a merchant cash advance
is repaid anywhere from 8 – 18 months. Our network of MCA companies offer
some of the lowest factor rates around, and can get you funded within 48 hours.