What Are Merchant Cash Advances (MCA)?
In simple terms, a merchant cash advance is a loan provided to a small business, which are usually merchants, so that they may cover their current financial expenses. This cash advance is paid off by the lender getting a portion of the merchant’s business sales until the amount lent is returned.
MCA funds are generally quick to acquire, usually just a day after the application is approved. The lender has the choice to decide whether to take the amount back directly from the merchant’s bank account in portions or take a percentage of their business sales.
Merchant cash advances work differently from regular loans. They aren’t paid off on an interest multiple, but on a different surplus method called a factor rate. Say you’re a merchant and you’ve taken out an advance of $80,000. If your factor rate is 1.5, then you’ll have to pay back $120,000, or $40,000 more than your initial withdrawal, plus additional costs if there are any.
How Do Merchant Cash Advances Work?
As mentioned before, there are quite a few ways you can pay off your MCA. If you go for the periodic option on your business sales, then the lender will cut a percentage of your daily sales from your credit and debit card sales, provided you have strong sales in that category.
Using the above example, and considering your monthly sales to be $80,000 and the agreed-upon deduction rate by the lender to be 10% of your daily sales, it’ll take approximately 451 days to pay off your loan.
This method entirely depends on how your monthly sales are doing, and considering that everything goes well, you’ll be paying the lender at least $260 every day.
This daily amount can also vary depending on how well your sales perform. If sales fall below expectations, then you won’t be able to pay off the advance quickly, but the annual percentage rate will be lower. If you manage to exceed your sales expectations for the month, then you can pay off your advance quicker, but, of course, with a higher APR.
Alternatively, if your credit and debit card sales aren’t your main source of revenue, then the lender can agree to take out money from your bank account each month to pay off the loan. The amount taken out, however, will be at a fixed rate.
Who's Eligible to Get a Merchant Cash Advance?
As mentioned, MCAs are typically designed for those small businesses that need to cover unforeseen expenses in a short time. Hiring employees, ordering resources, buying new equipment, or preparing for a high-demand season can all be met with the cash advance.
However, not every merchant can apply for an MCA. There are some prerequisite requirements to be met before a merchant can start filling out the application form for the advance. The general minimum qualifications are as follows:
One year of business
This requirement can vary depending on your lender, but it is usually set at a minimum of one year in the business. This helps your cash advance lender understand that you have experience in your line of work and are well familiar with all the procedures to deal with. This assures the lender that you will have the means to make the money back and pay off the advance in the agreed-upon period.
$50,000 annual revenue
This sum shows your credibility as a business and becomes another asset towards persuading a lender to approve your request for an MCA. To prove that you can indeed return the advance taken from the lender, this amount is of paramount importance.
500+ credit score
Another piece of evidence that is used to show that your financial status is good is your credit score. This too factors into your chances of getting approved for an MCA.
How to Apply for a Merchant Cash Advance?
The MCA can be decided in as little as a few hours to a few days. Once approved, the merchant can have the funds with them in two business days.
The application form will ask you for the following:
- The amount you want for your MCA.
- Your company’s name.
- Your business address.
- Your contacts, i.e., your phone number, email, and any other platform on which the lender can contact you.
- The mean annual revenue of your business.
- The average monthly volume of your credit card.
- How many years have you been in business?
- Business name.
- Business owner’s social security number.
- How much of the business do you own?
- The business owner’s home address.
Apart from the basic requirements mentioned, there will be a need for a few documents for the application. Be sure to have all these on-hand, making sure they are valid:
- Business ID
- Your government-issued photo ID (driver’s license, passport, ID card, etc.)
- Your credit report
- Bank statements
- Recent credit card processing statements
- Recent tax returns
Keep in mind that if you still have a previous loan of any kind to be paid off, the lender will not approve your application.
Once approved, the lending firm or individual will contact you regarding what to do next and how to have the funds directly transferred into your bank account.
Top 5 Merchant Cash Advance Companies
We have compiled a list of the top 5 best MCA companies that have helped numerous business owners out of their financial problems and helped them prosper beyond expectations.
We hope that these firms will prove to be enticing to you as well:
Lendio has proven to be the best among all MCA marketplaces overall. Lendio will submit your application to multiple lenders and present you with a list of offers from them.
You have the freedom to choose from that list and select which one suits you best. Factor rates, retrieval rates, and cash amounts are all listed in those lenders' attributes, so you can compare any attribute that suits your requirements.
It does take a longer time for your application to get processed on Lendio, and there have been reports of hard credit inquiries, but besides that, Lendio is by far the best marketplace for MCAs.
Many business owners have only had positive reviews to leave on this website. It has a whopping 4.9-stars out of 5 on TrustPilot and has proven to be a great marketplace for MCAs.
Forward Financing is known for its great customer service, quick and simple application process, and readily accessible funding. It has the best customer reviews of all lenders.
The credit score requirement is not too strict, and you have the option of same-day funding. The available funds can go up to $300,000 with a minimum of $10,000 minimum monthly business revenue.
With factor rates starting at 12% and advance amounts going up to $500,000, Lendr is your best option if you’re looking to withdraw a large advance for your business. Compared to Lendio, Forward Financing, and Payability, it has $200,000 more than their highest threshold, making it the best for merchants who need to cover large expenses in a short amount of time.
Lendr has many great customer reviews, making it a very credible lender, especially for businesses that are prosperous and require funding to cover unexpected costs.
The requirements are a little stricter than the others, usually requiring a great credit score and at least a year of being in business.
Do you own an online business and require an MCA that has no credit score bars and less time being in the business? Well, look no further because Payability is the option for you!
With the requirement of being only 9 months into the business and only considering your online sales, Payability grants merchants the ease of getting paid quickly and is a better option than all other lending firms.
Starting at a low factor rate of 1.1% and a maximum advance amount of $500,000, Fundera is similar to Lendio in the sense that it is a lending marketplace, and your application for funds will be submitted to lenders and a list of potential deals will be placed in front of you.
Fundera sometimes comes up with more options available to you than Lendio, making it a better option in a few situations. However, the funding time is slower, and the credit requirements are usually higher than with other lending firms.
Pros & Cons of Merchant Cash Advances
While MCAs do have many benefits for a business, both sides of the scale should be considered before deciding to opt for one. To list a few benefits of MCAs, they are:
These applications are usually completed online, with the submission of supporting documents facilitated on lender websites too. It takes no more than a few minutes, with a maximum of an hour, to fill out and submit the form.
Low credit score requirement
MCAs are taken to help merchants get out of the mud of bad credit scores, so having great scores is not a necessity to apply for one. However, there will still be minimum requirements to apply as a lender does need proof that you will be able to pay off the loan given to you.
Traditional bank loans require you to pay a fixed amount every month, MCAs, however, have flexible monthly rates that are based on your monthly credit card sales. This means you won’t have to worry about making the payment, even during low return months.
Quick funds transfer
MCAs are quick to apply for and quick to gain returns from as some lenders guarantee approval of your application and transfer the funds into your bank account in as little as 24 hours to 48 hours. It beats traditional bank loans by far in the area of application processing.
No collateral requirement
Personal liability worries can now be forgotten as no asset from your business will be put at risk when you apply for an MCA.
Drawbacks of Merchant Cash Advance Loans
After listing the benefits of MCAs, the drawbacks are to be noted as well:
MCAs are not regulated
Since MCAs aren’t traditional loans, state usury laws don’t apply to them, and the percentages are decided by the lenders, which are usually very high. Desperate merchants will agree to unreasonable retrieval rates and terms by the lender and end up in more financial peril than they were already in.
More expensive than traditional loans
If a traditional loan is taken, the interest rates range roughly from 6.25% to 16% whereas, for MCAs, the rates range from 5% to 20%. According to Leonard C. Wright, CPA and Money Doctor columnist, the APR ranges from 60% to 200%.
Shorter Repayment periods
MCAs usually require merchants to pay off their loan within 6 to 8 months, making it an ordeal for the owners to generate the amount to be lent back within the time given. For them, 90 days to 18 months is the optimal time for them to be able to generate that much revenue and more.
Limitations on business operations
Due to some MCA receivers trying to cheat the system by encouraging cash payments instead of credit card payments, lenders place limitations on their merchants by stating that they cannot give discounts on cash payments, and they cannot switch credit card processing companies for the repayment period specified.
Alternatives to Merchant Cash Advance
In case you’re not pleased with the disadvantages of merchant cash advances, WeLoans is here to provide quicker and safer options as compared to risky and expensive MCAs. Some of the alternatives that WeLoans offers are:
This is a short-term loan with a modest maximum amount that can be borrowed and paid back until you receive your next paycheck. However, because there is no need for collateral, interest rates are usually very high. This is the quickest loan available, and you will not be required to repay the loan in installments but only once in full.
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Installment loans allow borrowers to borrow large sums of money and repay them over a period of time. The repayment stress can be much lighter for you as you can pay back in installments instead of a lump sum. And you have the repayment date in mind and gain peace for yourself.
Title loans allow you to borrow money using the title to your automobile or another valuable item as collateral. It is the quickest way to get cash because the money is transferred directly into your bank account an hour after your application is approved. You won't even have to turn in your car because only your title is required. As a result, you are free to drive your car as you like!
WeLoans doesn’t charge extra fees for early repayment, and in doing so, you actually save a lot more than what you owed in the beginning. Our loan repayments work in the same way as MCAs, letting you have automated debit over the term of the loan, with debits being made every month.