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A merchant cash advance (also known as an MCA or cash float) can be a useful way for cash-strapped businesses with few financing options to get the money they need.

The concept is simple: Lenders grant you money now in exchange for a portion of your future sales. However, an MCA’s accessibility comes with a steep cost, so it’s important to know what they’re best used for—and when to avoid them entirely.

If you’re in search of quick cash for your business, read on to learn how merchant cash advances work, the advantages and disadvantages of using them, plus where and how to get one.

What is a merchant cash advance?

A merchant cash advance is an alternative financing method often used by small businesses without access to traditional bank loans or lines of credit.

The business receives a lump sum payment in exchange for a percentage of its future credit card and debit card sales. Over a period of months, the lender then takes revenue from the business’s card transactions to recoup the money.

How do merchant cash advances work?

As mentioned above, merchant cash advance providers take a portion of your future sales as repayment for your principal balance plus fees.

Compared to traditional business funding options, where interest is determined by your interest rate, merchant cash advance fees are based on your factor rate. You can multiply this number—which typically ranges from 1.1 to 1.5, depending on your qualifications—by your advance amount to calculate your total interest.

For example, let’s say a lender approves you for a $10,000 advance with a factor rate of 1.5. This means that, for every dollar you borrow, you’d pay the lender $1.50.

To calculate your interest, multiply the amount you borrow by the factor rate. Then subtract your borrowing amount from the total.

$10,000 x 1.5 = $15,000

$15,000 - $10,000 = $5,000

In this example, you’d pay an additional $5,000 in interest for your business cash advance.

This number may not reflect your total amount owed, however. In addition to the factor rate, some lenders also tack on origination fees and other administrative costs—further increasing your total balance.

How are payments on a merchant cash advance made?

MCA repayment is structured in one of two ways:

Percentage of card transactions

This method is the most common one used by merchant cash advance companies. A provider will automatically deduct the agreed-upon payment amount (known as the holdback percentage—this is typically between 10% and 20% of your daily credit card sales) directly from your merchant account until the balance is repaid.

Here, the amount withdrawn by the lender depends on your credit card sales volume. The more sales you make, the faster your advance is paid off.

ACH withdrawals

In this method, the lender takes a fixed amount from your business bank account on a daily or weekly basis—sort of like a term loan, just on a much faster repayment schedule. Because repayments are fixed, lenders don’t need to know your sales volume. The amount is determined by your estimated monthly revenue instead.

Benefits and drawbacks of merchant cash advances for small businesses

Pro: Fast, accessible funding

A merchant cash advance is great if you need money now and don’t have many other options to rely on.

An online application combined with a quick turnaround time makes this method particularly attractive to small business owners. With some lenders, approval can take less than 24 hours and funding about 3 business days or less.

And because they’re considered a cash advance instead of a loan, they’re not subject to the same stringent regulations as traditional loan products.

You don’t need a high credit score or collateral to qualify, for instance. MCA lenders are more concerned with your monthly revenue and credit card processing statements than whether you have bad credit—although they’re still more likely to give you a lower factor rate if you have a strong financial profile.

Pro: Flexible repayment terms

Repayment is dependent on the volume of your future credit card sales, rather than the usual financial markers used by banks and traditional lenders.

During slow months, you don’t have to worry about affording fixed payments. You only pay a portion of the money you make that day. Some lenders go the extra mile and allow you to readjust your holdback amount during slow periods if repayment is causing financial hardship for your business.

Con: Expensive compared to other small business financing options

Because they work with riskier borrowers, MCA lenders offset the financial risk involved by charging higher interest rates. As a result, it’s common to see APRs ranging from 70% to even 350%. Avoid paying hefty fees by looking into other business financing options first.

Con: Frequent repayment schedule

With traditional loans and business credit cards, you make one payment a month on a fixed schedule. Because you know your minimum payment upfront, you can budget around that and adjust business spending as needed.

On the other hand, the daily or weekly repayments involved with MCAs mean that, no matter what your other financial obligations are, your lender will withdraw the money it’s owed according to schedule anyway. High sales volume means that more money is taken out of your account—which makes these payments difficult to budget for.

And because money is automatically withdrawn, you also can’t pay off your debt early to save on interest.

Con: Doesn’t build business credit

Unlike with traditional loan products, payments toward a merchant cash advance do not build your credit history. This is because MCA providers do not report the payments to business credit bureaus.

Unless you really have no other alternatives, consider pursuing options that do build your business credit first. This will allow you to make the most of your current financial situation and help you qualify for better financing options in the future.

Con: Must accept credit card transactions

Because merchant cash advances rely on credit card payments, this financing method is only available to companies that process a significant amount of card transactions each month.

Some lenders will also require you to give them access to your merchant account or purchase hardware directly from them in order to withdraw payments.

When is a merchant cash advance right for your business?

Similar to working capital financing options, merchant cash advances are best for those who want a short-term loan to pay off short-term expenses, but don’t have access to cash or traditional loan products.

Businesses with long-term cash flow issues should avoid this type of financing. Because of the fees involved, MCAs are not a long-term financial solution and can hurt your business if you don’t have the steady credit card sales needed to cover repayment.

Where to find MCA lenders and how to apply

You won’t find merchant cash advances offered by banks and other traditional lending institutions, so your best bet is to find a provider online.

Make sure to do your due diligence when vetting your options. Since the MCA industry isn’t well-regulated, there are many predatory lenders that are happy to take advantage of a business owner who doesn’t know any better.

The application process is a short one, with little documentation required. You’ll typically need the following:

  • Government-issued photo ID for all business owners
  • Business license (or other documentation proving at least 6 months in business)
  • Business bank statements from the last 3 months
  • Credit card statements from the last 3 months
  • No open bankruptcies

Since lenders use credit card transactions to determine repayment, keep in mind that you’ll likely need at least $5,000 in monthly credit card sales to qualify.

Make sure to check your agreement before signing too—your factor rate and list of fees will be noted there, so make sure you’re able to repay the amount in full before you take on the debt. Once you submit your application, you can expect to receive updates on approval and funding in a matter of days.

What alternative funding options do business owners have?

If you’re looking into merchant cash advances to finance your business operations, chances are you’re having difficulty getting traditional business loans or lines of credit. Don’t give up, though, as you still have many alternative startup funding options available to you.

Programmatic funding

A type of funding pioneered by companies like Capchase, programmatic funding gives businesses with predictable recurring revenue—such as SaaS companies—access to funds by borrowing against their annual recurring revenue.

Programmatic funding unlocks more credit for borrowers as the company’s revenue increases, so they can access the money they need without seeking additional funding or applying for loans. This, in turn, frees founders from the burdens of fundraising when their time could be better spent scaling their company.

Commerce sales-based underwriting

E-commerce businesses experience a unique set of financing constraints that aren’t often seen with other types of businesses. For instance, many of them work with very low profit margins—especially when they first start out—and because they operate online, they don’t have as many assets to use as collateral for business loans.

Commerce sales-based underwriting, a financing solution offered by Ramp, pulls sales data from your online storefront and payment platforms and uses it to build your credit risk profile. This offers a much more accurate snapshot of your business finances so you can qualify for better financing terms and credit limitss than you’d get otherwise.

Once funding is secured, what’s next?

If traditional business financing options seem out of your reach, Ramp’s suite of finance management and automation tools can help.

Our underwriting program helps cash-strapped businesses get access to credit limits up to 30x the amount they’d get with traditional corporate cards—all without jumping through the hoops required by these card issuers. Timing is crucial, especially for online businesses, and this solution ensures you get quick access to cash right when you need it.

Then, use our powerful spend management features—including spend controls and automated approval workflows—to keep an eye on how money is spent across your organization and prevent out-of-policy spend before it happens.

And with Ramp, this is just the beginning. To learn how our platform can help your business maximize savings and work more efficiently, apply for an account today.

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FAQs

What is the difference between a merchant cash advance and a small business loan?

The biggest difference between a merchant cash advance and a small business loan lies in their repayment terms. 

MCA repayment amounts depend on the borrower's daily or weekly credit card sales, and all interest on the principal is charged upfront and added to the total. In comparison, business loans have set terms and repayment schedules, with monthly interest fees that are calculated based on the remaining loan amount. 

Because MCAs are automatically repaid with your credit card transactions, you don’t actually see any of the money your lender takes from you. Small business loans can be repaid with any funds, and some lenders also allow you to pay the remaining balance early without penalty. 

How much can you get from a merchant cash advance?

The exact amount varies between lenders, but you can typically borrow between $5,000 and $500,000 from most providers, depending on your qualifications. 

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