A merchant cash advance (MCA) is a type of business financing that is characterized by advance lump sum payments that are made to a business in exchange for a percentage of future credit card transactions.
MCAs have faster, simpler application processes and higher approval rates than other forms of business financing, such as loans and lines of credit, which makes them a popular option for many small- and medium-sized businesses.
Under an MCA, a lender provides a business with a cash advance in exchange for a percentage of the business’ future debit and / or credit card sales. The business pays the percentage regularly, such as weekly or even daily, until the advance is repaid. Some MCA agreements may rely on a fixed sum repayment plan instead of a percentage.
An MCA agreement generally consists of:
For example, an MCA of $200,000 with a factor of 1.5 would have a full payback amount of $300,000. To pay that back, the lender would charge the business a retrieval rate of up to 20% of future sales.
Businesses in need of financing often turn to MCAs instead of traditional loans because of the speed, ease, and flexibility they can provide:
MCAs have simpler application processes than traditional business loans, with fewer requirements. Businesses may not need to provide collateral or show high (or any) credit scores. This can be valuable for new or struggling businesses that aren’t as well established.
MCAs can go from application to approval to payout within a couple of business days. This can provide businesses with needed sources of cash far quicker than with traditional loans, which have a lengthier application and approval process.
Under percentage-based MCA plans, businesses pay only a portion of their sales. This can offer more protection and flexibility than a fixed loan payment, which stays the same even if business volume drops or goes through a slow period.
In spite of some advantages, MCAs do have numerous disadvantages that make them undesirable for more established businesses.
MCAs are not regulated the way other loans are and do not adhere to usury laws, so they may charge substantially higher rates than other loans.
Because of the higher interest rates and aggressive payment schedules, MCAs can ultimately cost a business much more than traditional business financing.
Because MCA are not considered conventional financing, they do not show up on credit reports and thus don’t allow a business to build and establish a credit history.