Merchant cash advances (MCAs) differ slightly from ordinary loans.  When a merchant applies for an MCA, the financing company will advance him or her cash in return for a percentage of the business’s daily sales and a fee.  Unlike personal loans, MCAs don’t require collateral and applicants don’t need to have perfect credit scores in order to qualify for them.

Those who have never applied for a merchant cash advance are often somewhat intimidated by the process.  This article will provide a basic guide to how to apply and what to expect, offering helpful tips and information along the way that can make the prospect of applying for an MCA seem a little bit more manageable.

How Do MCAs Work?

Merchant cash advances allow business owners who might not qualify for a traditional loan to access the cash they need to ensure their companies’ ongoing success.  The approval time and fund dispersal time associated with a merchant cash advance is far lower than that of traditional loans and a larger number of applicants will be able to qualify for an MCA.  How, exactly, do they work, though?

An MCA provider offers business owners lump sums of cash in exchange for a percentage of their daily credit and debit card sales and a fee.  Payments are usually made by remitting the pre-determined percentage of sales revenue from the company’s bank account through automated clearing house withdrawals.  This makes it easy for business owners to stay on top of repayments.


Understanding Factor Rates

One important difference between MCAs and business loans is that while loan providers measure fees according to interest rates, merchant cash advance companies use factor rates instead.  Factor rates range across the industry from 1.14 to 1.48. They are multiplied by the loan amount to determine the total amount of money owed, which helps to explain why the APR on MCAs varies so significantly.

Some applicants will be offered rates that start at around 15%, while others will wind up with rates in the triple digits.  Part of the reason the fees associated with merchant cash advances are so high is that they tend to cater to higher-risk borrowers such as new businesses and those with low credit scores.  As in the rest of the financial industry, this translates to comparatively higher rates and fees.

Repayment Periods

The length of time required to repay an MCA will vary based on the amount of the advance and its APR.  Average repayment time is around 9 months, but some business owners will have their MCAs paid back in 4 months and others may take as long as 18.  It’s worth noting that in general, the higher the fixed percentage of sales associated with an MCA is, the shorter the repayment period will be. This is both a blessing and a curse as a shorter repayment period means that business owners will have to remit part of their daily sales for only a few months but will also have less cash on hand throughout that shorter repayment period.

Who Qualifies for MCAs?

As noted above, merchants applying for a cash advance do not need to have perfect credit.  Eligibility standards for MCAs are lower than those associated with personal loans, so most small business owners tend to qualify.  In fact, even businesses with limited histories and little or no collateral may still be able to take out merchant cash advances.

Since MCAs are paid back daily based on credit card sales, financial institutes that offer merchant credit advances will evaluate applicants’ credit card processing statements to see whether their companies are making enough sales to ensure that they’ll be able to pay everything back on time.  Some financial institutions will also request bank statements and credit scores, although not all of them require this additional documentation.

The Application Process

Applying for an MCA is actually surprisingly easy.  Most companies offering MCAs allow business owners to fill out their applications online and many offer same-day approval for qualified applicants.  It’s important to recognize that the ease of application and speed at which merchants are able to get the cash they need to keep their businesses running smoothly often comes at the cost of comparatively high fees.  However, most merchants who apply for MCAs find that the high cost of capital is worth paying to help keep their businesses afloat or facilitate their growth.

Required Documents

There are a few different documents that will be required during the application process.  Applicants should have their driver’s licenses, bank statements, credit scores, credit card processing statements, and business tax returns on hand.  They should also obtain a copy of their credit scores and a voided business check.

Is it Really Worth It?

The decision to apply for a merchant cash advance should not be taken lightly, as they are quite expensive compared to other financial products and services.  For many business owners, though, MCAs are still the best available option.

The Pros

The most commonly cited advantages of MCAs over traditional loans are their ease of application and the comparatively high application acceptance rate associated with cash advances.  Many business owners also prefer paying back smaller sums each day to making larger payments and find that it’s easier to set up automatic payments than to risk missing a loan payment and winding up facing unnecessary fees.

Merchant cash advances are also unsecured.  This offers an advantage over most traditional small business loans, which typically require collateral.  Business owners who don’t want to place their personal properties or assets up as collateral often prefer MCAs.

The Cons

There is really only one true disadvantage of MCAs, but it’s a significant one.  MCAs really do wind up costing business owners substantially more money in the long run than traditional loans.

The Take-Away

Ultimately, the decision to apply for a merchant cash advance is one that each business owner has to make for him or herself.  They do offer substantial advantages over traditional loans, so many applicants find that MCAs are worth the extra cost. Hopefully, this article has made the decision and application process a little bit easier for those who do choose to apply.