Merchant Cash Advances

What is a Merchant Cash Advance?

MCAs explained

As a small business owner, there are going to be times when you need additional cash to keep the company running smoothly. There could also be instances when you need a loan in order to pursue an expansion project. Additionally, it may come up that you are going to launch a new product line and consequently need money to do so. Whatever the reasons, whatever the opportunity before you, the fact of the matter is, you need more working capital—and you need it quickly.

For many smaller companies, traditional financing can be difficult to get. Whether your credit score isn't where it needs to be, or you don't have enough years in business, or you're short the collateral necessary to secure a traditional loan, you're essentially stuck. This is never a good feeling. But there are resources out there and financing solutions that just might fit the bill.

One such financing option: a merchant cash advance. The good thing about a merchant cash advance is that you get the money you need right now to ensure that you can keep things running according to plan. And you don't necessarily have to have an excellent credit score to qualify. This type of business loan is designed for those small businesses who might otherwise not be in a position to take out a conventional business loan.

What Is a Merchant Cash Advance?

While some might be confused as to what exactly a merchant cash advance entails, it really isn't all that complicated. In fact, it is one of the fastest and easiest forms of financing available to small companies, particularly in this current economic climate. A merchant cash advance, in simplest terms, is a lump sum of money that is borrowed against a business's future sales. The money that you borrow will be repaid on a daily or weekly basis (depending on loan terms) until the total amount is repaid in full.

Given the scope of the loan and the amounts most often available, merchant cash advances are generally considered to be shorter term loans. Because the lender is loaning you money and using your future sales as security on the amount funded, your credit score doesn't always have to be high to qualify, nor do you need collateral in most cases to be approved for a merchant cash advance.

One of the benefits of this type of loan program is that the money is usually made available to you within a couple of days after you apply—sometimes it can even be available that same day.

Understanding How a Merchant Cash Advance Works

There can be differences in terms of how merchant cash advances work; in other words, not all merchant cash advances are exactly the same. First off, with a traditional MCA, a lender will want to see that you have a relatively large volume of debit and/or credit card sales. With a traditional merchant cash advance, the loan amount is based upon a projection of future sales. They will use your sales history to determine approximately what those future sales might look like.

Now, that said, there are programs designed to serve businesses with smaller numbers of credit/debit card sales. The difference lies in how the loan amount will ultimately be repaid. Additionally, keep in mind that different lenders will assess your company differently. What may be a risk worth taking to one lender, may be a no-go for another. That is why it's important that prior to signing with an MCA lender, you do your due diligence as far as understanding their terms rates and repayment options.

Conventional Merchant Cash Advance Options

Traditionally, when you are approved for a merchant cash advance, the funds will appear in your bank account and then the repayment period begins. The process by which repayment happens is called holdback—the lender will take a percentage of your daily or weekly credit card sales and apply that money toward your loan repayment.

Because these are considered short term loans, the repayment period is usually only a maximum of two years (some can be as short as 3-6 months), so make sure you know exactly what you're signing up for ahead of time.

As the repayment of the loan is based upon a percentage of your sales, the more you sell, the more you pay back, the shorter your overall repayment period will be. Therefore, there really is no “final” payoff date; rather, it largely depends upon the sales volume that your company does beginning right after you receive the loan funds.

So, let's say for instance, that per your agreement with the MCA lender, they will deduct 10% of your daily and/or weekly credit card sales. If those sales go up during this time, then your payments go up as well. Ten percent of a $5000.00 week is obviously going to be greater than ten percent of a $700.00 week.

This system generally works to the advantage of small businesses. When things are slower, when sales drop off, you are not having to pay back as much as when sales are booming. In other words, it really is tailored to accommodate the rate at which you are bringing money in.

The Requirements for an MCA

As with any business loan type, you must meet certain requirements before an MCA lender will approve your application. The more prepared you are, the more organized your application materials, the better your chances of approval.

A merchant cash advance lender will use your current and projected credit card sales to determine how much your business is eligible to receive. The holdback percentage is calculated accordingly, meaning, that the lender will take a variety of factors into consideration, primary among them: the expected payback period and the amount of funding that you receive. Most often this holdback percentage will fall somewhere in the ten to twenty percent range and will be based upon daily and/or weekly sales.

The lender of course will also look at your creditworthiness when evaluating your application. That is not to say that if your credit score is less than ideal you will not receive funding, however, this could affect the terms of the loan in some cases.

ACH Merchant Cash Advances

Beyond the traditional merchant cash advance, there are also ACH merchant cash advances. ACH stands for Automated Clearinghouse Withdrawal. Versus repayments based upon a percentage of sales, an ACH MCA usually involves fixed payments over a specified and set amount of time. So even if sales are slower, you will pay the same. By the same token, if sales increase, the amount you're repaying will also stay the same.

Requirements for an ACH Merchant Cash Advance

Unlike when evaluating a business for a traditional merchant cash advance, in which the lender focuses on projected credit/debit card sales, with an ACH MCA, the lender will focus more on the annual revenue of a company. So even if your business does not largely deal in credit card sales, you still can apply for this type of merchant cash advance as it is based upon your total revenue instead of on credit card sales.

Rates for Merchant Cash Advances

This is a big concern for many small companies that apply for a merchant cash advance. The various rates and consequently how much the overall loan costs can be a major determining factor when it comes to whether or not this business loan type is right for your company.

Typically speaking, a company that takes out a merchant cash advance is going to pay back anywhere from 10% to 30% of the total amount borrowed. It could be more depending on your credit score, years in business and annual revenue. This is why you definitely want to evaluate lenders carefully prior to choosing one with whom you want to work. This percentage that you pay is called a factor rate.

MCA Rates Versus Interest Rates

Is there a difference between your MCA rate and a traditional interest rate? Keep in mind, interest rates accumulate over time. Whereas, with an MCA rate, the amount is calculated only once and this is at the time that the loan gets originated. So, the rate for your MCA remains the same throughout the repayment term. Regardless if you pay your loan off in three months or twenty months, you're still paying the same MCA rate.

How is this factor rate determined exactly? The lender will take a number of things into consideration when calculating your MCA rate. Everything from the average sales that the business does to reliability of your sales numbers to years in business, among other factors, will be evaluated when the lender sits down to come up with your final MCA rate.

Should You Consider a Merchant Cash Advance?

This is what it all comes down to…Is an MCA right for your business? Should you go through the process of applying for and awaiting on an approval? The good thing about working with MCA lenders is that fortunately the process and approval times are generally quite fast—sometimes you can get funded the same day you apply. The key really is to understand all costs associated.

Be aware that you are likely paying anywhere from 10% to 30% of the total amount as far as your factor rate. If you need additional working capital and traditional loans are out of reach, this could be the way to go.

Pros and Cons of a Merchant Cash Advance

Let's take a look at some of the pros and cons associated with getting a merchant cash advance for your small business:


  • The approval process is fast. The application process is streamlined as well. Usually, you get a decision within just a few hours and funding can come the same day.
  • No collateral requirements. Your future sales are the collateral here. This is therefore considered unsecured funding for all intents and purposes.
  • You don't have to have excellent credit to qualify. Again, because future sales are what the lender is basing qualification on, they are weighing credit score less than they normally would. In other words, they are primarily concerned with available cash flow to enable you to repay the loan in a timely manner.


  • MCAs can come with higher fees than other loan types.
  • As they are short erm loans, those shorter repayment periods can be difficult for some companies to manage. Often the money must be repaid within a year or less
  • The amount you can borrow tends to be lower than with say term loans for example. Remember, the amount you're advanced is dependent on your sales history and projections.
  • Daily repayments involved. You definitely want to keep this in mind as many MCAs do require daily repayment—this could impact your overall cash flow.

What a Lender Looks For

While MCA lenders are different and thus have different requirements, there are some more common criteria that most MCA lenders will look for in evaluating and then underwriting your loan. Instead of focusing heavily on credit history and score, they tend to look more at your sales deposits and sales history. As they try and predict your future revenue, they first need to get a good handle on your past revenue. Beyond just sales deposits and annual revenue, some of the other factors that can impact a lender's decision include:

  • Industry type: Different industries have different risk levels and so this can influence an MCA lender's decision. For instance, if your industry is more seasonal and therefore has periods of high and low sales, this will definitely factor into their final decision.
  • Years in business: While this is not necessarily going to disqualify you, a lender does like to see some sort of a track record of sales. If you haven't been in business that long you may still qualify but with a higher factor rate.
  • Business growth:One of the first things a merchant cash advance lender will do is to perform a thorough assessment of your finances and consequent ability to repay the loan in full. If you show consistent growth and robust sales, this is likely to tip the scales in your favor.
  • Overall credit history:Again, you do not necessarily need an excellent credit score to qualify, however, they will take a look at your overall credit history in order to get a sense of your repayment habits. The better score you have, the lower your rate will be.

First Union's Merchant Cash Advances

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