How a Merchant Cash Advance Works

If you’re a small business owner in need of fast working capital, you likely don’t have the time to wait for a traditional loan. Bank loans require a lot of paperwork and can take weeks to fund. A merchant cash advance provides you with an alternative. Here’s what you need to know.

What an MCA Is

A merchant cash advance (MCA) provides an alternative to traditional financing. It’s not a loan; it’s an advance on your future sales, and you can set up payments in one of two ways.

Percentage of your credit/debit card sales. The MCA provider takes a percentage of your daily or weekly credit/debit card sales until you repay your advance (plus fees). The more you make, the more you pay. Conversely, lower sales result in lower payments (and the advance takes longer to repay).

Fixed ACH withdrawals. If your business doesn’t rely heavily on credit/debit card sales, you can opt to have your payments automatically withdrawn from your bank account daily or weekly. Your payments are fixed, so you pay the same amount every day (or week) regardless of your sales volume.

How Much It Costs

Instead of traditional interest rates, MCAs have a factor rate. The rate, typically ranging from 1.2 to 1.5, is assigned based on a risk assessment. It determines the total fees you’ll pay in addition to how much you need. A $40,000 advance with a factor rate of 1.3 means that you’ll have $12,000 in fees. The total amount you need to repay is $52,000.

Reasons to Consider an MCA

You get access to working capital quickly. The application process is much simpler than applying for a traditional loan. Once approved, you can see the funds in as little as 24 hours.

They’re unsecured. You don’t have to provide any collateral for an MCA. You won’t be out any business or personal assets if you go out of business or can’t make your payments. You may, however, need to provide a personal guarantee.

Your payments may vary based on your sales. If you structure your payments based on a percentage of your credit/debit card sales, they’ll fluctuate based on how much you make.

Drawbacks of an MCA

While there are benefits to an MCA, there are a few potential drawbacks:

  • They can be expensive.
  • There’s no benefit to paying off your advance early.
  • You run the risk of falling into a debt cycle.

A merchant cash advance can help to provide your business with essential cash flow, but you should do your research first. Look into all available financing options and compare different companies to ensure you get the best deal possible.

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