What is a MCA - How it works and business benefits

What is a MCA? - How merchant cash advances work

A MCA, or merchant cash advance, has historically been for businesses whose revenue comes primarily from credit and debit card sales, such as restaurants or retail shops. Now, merchant cash advances are available to other businesses that don't rely heavily on credit card or debit card sales.

Merchant cash advance repayments can be structured in two ways.

You can get an upfront sum of cash in exchange for a slice of your future credit and debit card sales, or you can get upfront cash that is repaid by remitting fixed daily or weekly debits from your bank account, known as ACH, for Automated Clearing House withdrawals.

MCAs (Merchant Cash Advances) have become the most common type of cash advance, according to Sean Murray, a former merchant cash advance broker and founder of trade magazine deBanked. They're referred to as ACH merchant cash advances and allow providers to market to businesses that aren't primarily tied to credit and debit card sales.

Instead of making one fixed payment every month from a bank account over a set repayment period, with a merchant cash advance, you make daily or weekly payments, plus fees, until the advance is paid in full.

How much you'll pay in fees is determined by your ability to repay the MCA. The merchant cash advance provider determines a factor rate typically ranging from 1.2 to 1.5 based on its risk assessment. The higher the factor rate, the higher the fees you pay. You multiply the cash advance by the factor rate to get your total repayment amount.

For example, an advance of $50,000 that carries a factor rate of 1.4 represents a total repayment of $70,000, which includes fees of $20,000.

Total Advance

$50,000

Factoring Rate

1.4%

Total Fees

$20,0000

Total Repayment

$70,000

Terms to Understand When considering Merchant Cash Advances

There are a few terms that you're going to need to understand when you're looking at Merchant cash advances for your business.

The MCA Factor Rate

This Factor Rate is a calculation that helps you determine how much money you will pay back in total. Your merchant cash advance's total costs are determined by the amount of the advance and your factor rate (which usually ranges between 1.1 and 1.5). Your factor rate is dependent on your business's credit and financial strength—better credit means a lower factor rate. For example, if you received a $50,000 MCA with a 1.15 factor rate, you'd owe a total of $57,500.

The MCA Holdback Rate

The Holdback rate is just the percentage of your daily credit card sales that an MCA provider will take until you pay back what you borrowed. This percentage is usually between 10% and 20%. Lenders will automatically take these “payments” out of your account each day. More sales mean higher payments and a faster payback period fewer sales mean lower payments and a slower payback period.

Best Uses for Merchant Cash Advances

Every business that uses merchant cash advances services utilizes it for their own reasons. Some of the best uses for merchant cash advances are:

• Temporary cash flow help
• Purchasing inventory
• Unplanned expenses
• Paying other debts
• Working capital

Benefits of Merchant Cash Advance Services

There's always a way to get the capital you need. If you've been denied a term loan or a business loan.

• You'll receive a lump sum of cash very quickly
• You don't need impeccable credit
• There's no set payment amount
• You're not risking assets or your credit rating

A MCA cash advance is a quick way to get funding without facing a strict approval process. In this post, we'll reveal five benefits that come with receiving a merchant cash advance and will explain why it might be the best financing choice for your company.

How to Qualify for a Merchant Cash Advance

Qualifying may be the easiest part of working with a merchant cash advance. Unlike most business financing options, applicants don't need to have years in business to qualify. The amount and number of your credit card transactions are more important than a business credit profile, putting less emphasis on personal and business credit information solid sales numbers can help a business with poor credit qualify for a merchant cash advance.

Most providers offer online applications, making the already quick process even more convenient for business owners.

Business Cash Advance (BCA)

A business cash advance (BCA), also known as the Purchase of Future Sales Agreement, that cash advances a merchant's future sales at a discount. The business owner is responsible for paying back a fixed payback known as a specified amount, which is higher than the amount that was advanced to the company. This difference between the advance amount and the payback amount is called the Factor Rate or cost, which is a fixed cost. These are not principal & interest costs. The advance is repaid by taking a fixed percentage of overall deposits called the specified percentage.

Merchant cash advance with bad credit

Another main advantage of merchant cash advance is that businesses with bad credit or limited credit history aka (thin credit) still have a great chance of being approved.

Merchant Cash Advance FAQs

Here at First Union Lending we have received our fair share of questions about Merchant Cash Advances. As always feel free to give us a call at 863-825-5626 with any questions you might have. In the meantime here are some of the top questions of the day.

What is a factor rate?

The factor rate will determine how much you repay for your advance. For example, with a 1.3 factor rate, for every $1,000 you receive, you'll need to repay $1,300. This factor rate generally ranges from 1.1 to 1.7, solely based on your business's creditworthiness and finances.

Can I prepay and is there a prepayment penalty?

Merchant cash advances don't have a prepayment penalty, but you also won't necessarily save money by prepaying your MCA. Unlike a loan that accrues interest over time, your factor rate and repayment amount are determined upfront. Prepaying may save you money on monthly administration fees, but it won't save you money on the cost of factor rate charges.

Is merchant cash advance a loan?

Technically, a merchant cash advance is not a loan, but rather a cash advance that you then pay back with a percentage of your daily sales––a merchant cash advance empowers your business to trade tomorrow's earnings for cash today. You're essentially selling your future sales at a discount.

Will a merchant cash advance hurt my credit score?

A MCA or Merchant Cash Advance has no direct impact on your credit or credit score. So while a cash advance won't hurt your credit score, it also won't help your business to build credit, which is often essential in order to qualify for bigger, more affordable loans down the road. Relying on MCAs and other more expensive financing options can be costly long-term, so you must find other ways to build your business credit score meaningfully.