What is a MCA (Merchant Cash Advance) and How Does it Work?

What is a MCA (Merchant Cash Advance) and How Does it Work?

So what is an MCA? Unlike a traditional bank, a lender who deals in MCAs tends to evaluate the criteria a bit differently. It's not as much about credit score or collateral as it is about your daily receipts. The amount and frequency of your receipts will essentially determine what you qualify for as far as the loan amount.

So, for instance, on days when you're doing well, you will pay back more than on those slower days. The payback amount depends on how your business is doing. In the early days of MCAs, generally, only those merchants who accepted credit cards were eligible—today, however, this is not the case.

You want to think carefully about whether or not a merchant cash advance is right for you. There are higher rates associated and because it is a short term loan, the repayment can affect cash flow. However, in some instances, an MCA may be just what you need.

Understanding the Basics of an MCA

As mentioned, traditionally and still in many cases, an MCA is used by those who regularly employ credit cards in their business model—places such as retail stores, restaurants, auto mechanic shops and the like. It's not a typical loan per se, rather it is considered to be an advance on any future revenue you have coming in. Most generally, there are two ways your MCA could be structured.

  • First off, there is what's called a credit card holdback. This is when you receive a set amount in a lump sum and then it gets repaid day by day via credit card sales—a small percentage of each sale will go toward the payoff.

  • You might also look into an ACH agreement. What this means is that you borrow money and then it is repaid via daily withdrawals from your bank account.

The ACH Merchant Cash Advance

The ACH option allows you to take out a loan even if you don't deal in credit card sales. Fixed payments are deducted from your business account every day.

Similar to the more traditional MCA, the amount you receive is based upon a projection of what your business will do in sales within a given month. Keep in mind, going this route, the amount you pay back daily will not be affected by how your business is doing. In other words, even during slower periods, you're expected to pay back the same amount.

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Repayment Options With Merchant Cash Advances

Most often, merchant cash advances are associated with a daily repayment schedule—in some instances though it may be weekly, monthly however is rare. So how exactly does the loan gets repaid, speaking in a more practical sense…

Split Payments

With this particular method, the lender takes some from each credit card transaction you have in a day. Generally, the rate falls somewhere in between 10-20 percent of what you take in.

Split payments are actually an efficient and easy means of repayment, primarily because the entire process is automated. You're not having to worry about whether or not you remembered to remit your loan payment with this option.

ACH Payments

The ACH withdrawal option has gradually come to be the most popular for MCAs. The lender deducts daily payments from your business bank account. This also is an automated process. The amount is fixed and so will not fluctuate in accordance with how well and/or not so well you may be doing during a given period.

Lock Box Withholding

With this means of repayment, the entire amount of your credit card deposits and sales is put into what is called a trust bank account. The creditor will then take their percentage and remit the rest to your business account. Keep in mind, there will be a delay with the money from that day's sales going into your account.

The Advantages of a Merchant Cash Advance

So why opt for this particular loan type…There are actually quite a few benefits to getting an MCA. The biggest being:

The Application Process is Fast & Easy

Unlike a traditional bank loan, you can fill an application outright online and receive a decision within hours. As far as the funding aspect of it, some can get the money in as little as two days. You will have to supply documentation such as bank statements, credit records, tax returns among other items, but the underwriting is far more expedient than with a typical loan.

No Collateral Requirement

You will not have to, for instance, put up your house or personal belongings. The sales themselves represent the security for an MCA.

Flexible Repayments

With the MCA that is based upon daily sales, you pay less when things aren't going as well. And on days when sales are up, your payment will increase accordingly.

Credit Score Doesn't Have to Be Perfect

While for many business loans you do need a good FICO, for an MCA the bigger concern is your projected sales numbers. Being able to show positive cash flow and a solid history of revenue is more important than having a perfect credit score for this loan product.

That Said There Are Some Drawbacks…

Higher Fees

More so than other loan types, the APR is going to be higher with an MCA. The rates may range anywhere from 10 to 40 percent. So do keep that in mind.

Quick Repayment

You definitely want to make sure that cash flow is where it needs to be as money will be coming out either daily or weekly.

Understanding exactly what an MCA entails may be a bit tricky—even for professionals in the business they can still seem somewhat complex. However, if you do need money fast and a traditional loan is out of reach, then an MCA is a good option. As long as you remember that it probably will be a daily repayment in some way and the rates likely will be high. We'd love to discuss the various MCA scenarios available. Call First Union today!

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First Union Lending LLC is a dually licensed Lender/Broker with its main offices located at 4900 Millenia Blvd First Floor Orlando, FL 32839. First Union Lending LLC and its ads are meant for continental United States, including Alaska and Hawaii small business owners. Business Loans offered by First Union Lending LLC have varying rates and terms that can range from 30 - 120 payments and all rates and terms are based on eligibility of the business and its owners. The actual terms are based on credit, business history, industry, amount and terms. As an example, a $5,000 loan paid over 5 years at 8% would have a total repayment of $6,082.92 over the life of the loan. We use the latest encryption to protect sensitive information transmitted online, as well as run our own secure server network to ensure your information is protected offline as well. California loans made pursuant to the California Financing Law, Division 9 (commencing with Section 22000) of the Finance Code. All such loans made through VBJ Consulting, LLC, a licensed finance lender/broker, California Financing Law License No. CFL#60DBO78163

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