Merchant Cash Advance

Understanding the Merchant Cash Advance

If a business owner needs quick access to cash to meet a short-term need for capital, sometimes he or she can leverage their credit card merchant account to access funds. A merchant cash advance (MCA) is an alternative to the lengthy approval process and strict credit requirements required for a traditional term loan.

It’s no secret that most businesses often need debt to drive growth and profitability, and in an increasingly digital world, debt is becoming more accessible. However, the growth in debt accessibility isn’t universally a good thing. Some borrowing methods marketed to small business owners, such as merchant cash advances, have confusing marketing, poor underwriting standards and astronomic interest rates that can trap business owners in unsustainable debt cycles.

The amount you can get via an MCA ranges from a couple of thousand dollars to over $200,000. Keep in mind, however, that the payback time is usually very short—18 months or less, in most cases. Aside from technical differences, merchant cash advances vary from traditional loans in a few ways. Instead of charging interest, cash advance providers charge a one-time fixed fee, calculated by multiplying a “factor rate” (sometimes called a “buy rate” or “one-time fixed fee”) by the borrowing amount.

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How a merchant cash advance works

Merchant cash advances technically aren’t loans. A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future 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.

  • A business owner receives a set dollar amount in their bank account.
  • In exchange, the business owner agrees to pay the issuer a fixed percentage of future credit card sales until the advance, plus a borrowing fee (interest), is paid off.
  • Merchant cash advances are fixed-price loans. That means that a business owner will pay a fixed amount of interest for the upfront cash no matter how quickly they pay off the loan.
  • Payments on cash advances are made daily, and fluctuate as sales volume fluctuates.
  • Whether sales are up or down, the issuer is almost guaranteed to get their cut of the daily sales.
  • A merchant cash advance contract would usually require you to agree to operate the business to the best of your ability and not undermine business performance in order to hinder your payments. You wouldn’t be responsible to repay the advance if the business fails for reasons outside your control.

Should I get a merchant cash advance?

There are risks associated with Merchant Cash Advances such as high fees and fast repayment terms. Businesses without other financing options can easily get in trouble having to take on more than one Merchant Cash Advance at a time to try to stay in business.

However, there are some advantages, application takes minutes and funding is fast, and because payments are based on sales, then a slow day will mean a low payment and vice versa . The more you generate sales, the quicker you pay back the advance.

When a merchant cash advance makes sense

Non-operating expenses.

Alternatives to merchant cash advances

Business owners aren’t always interested in the absolute lowest cost of financing. Sometimes important factors like speed and ease of application are important. However, business owners should understand the financing alternatives that may be available to them.

Working capital loans

Unsecured working capital loans are another product that tend to carry high interest rates and daily payments. Like merchant cash advances, borrowers can apply and receive funding quickly, often in less than two business days.

SBA-guaranteed microloans

If business owners have time on their side, an SBA microloan offers term loans for less than $50,000 at moderate interest rates (between 6.5% and 9%).

Small business credit cards

Although credit cards carry higher interest rates than most term loans, they offer small businesses multiple benefits. For example, a credit card may help a business build its business credit score, and in many cases interest on credit card purchases doesn’t start accruing until the end of a billing cycle.

Peer-to-peer (P2P) term business loans

P2P funding isn’t just for consumers seeking personal loans. Certain P2P platforms offer business loans at rates that range from as low as 4.99% to 29.99% APR. These loans require monthly payments, but they may be funded almost as quickly as cash advances for qualified business owners.

Where to shop for short-term business loans

Business owners can apply for these short term loans quickly through First Down Funding, and receive funding in just a few days. 

Short-term business loans tend to be a better choice for many businesses. This is due to the fact that many nontraditional funders are voluntarily disclosing APRs, fees and monthly payments. Contact First Down Funding for a full review and consultation about your financing needs

Quick apply with First Down Funding today. We will deliver quickly all financing options and rates available for your business.

Key terms to understand before you apply for a merchant cash advance

Upfront funds: This refers to the cash you’ll get immediately once a merchant cash advance clears. It is the amount of money you borrow in a merchant cash advance. In our examples, the amount borrowed is $10,000.

Price (also fixed fee, total cost): In the following examples, the merchant pays $11,400 to borrow $10,000. That means the merchant must pay back the initial $10,000 plus the $1,400 loan fee. Whether it takes you three months or six months to pay off the loan, the cost will remain $11,400.

Factor (buy rate, cash on): A factor expresses the total cost of the loan as a factor of the borrowed amount. In the second example, we see the factor rate 1.14. This means that the merchant will pay $11,400 to borrow $10,000.

Remittance rate (also daily card sales, percentage payback): The remittance rate is not your interest rate, even though some borrowers think it is. Business owners pay back their cash advances through a series of variable payments. The exact payment the owner makes each day is based on a percentage of credit card sales for the day. In both examples, we see that the merchant agrees to commit 11% of credit card sales per day to the loan. On a day where the merchant takes in $4,000 via credit cards, she will pay $440 toward the advance. On a day where she takes in $8,000 she’ll pay $880 toward it.

Origination fee: Most of the time, origination fees are calculated into the total price of the loan (explained above). However, an MCA Funder could charge an origination fee on top of their factor fee. This drives up the total cost of the loan.

Example 1: Cash advance product priced based on borrowing cost

Amount borrowed$10,000
Credit score needed500 FICO
Time to get cash24 hours
Borrowing cost$1,400
Total cost$11,400
Percent of daily credit card sales11%

Example 2: Cash advance product priced based on factor rate

Upfront funds$10,000
Factor rate1.14
Remittance rate11%
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