Merchant Cash Advance Info: What is it and When can You Use It?

Merchant Cash Advance: What is it and When can Small Businesses Use It?

Merchant cash advance info reveals that businesses around the country currently have about 1 million open merchant cash advance accounts, according to data from the Consumer Financial Protection Bureau.

While it’s certainly not as popular as other funding sources like credit cards, term loans, or factoring, it has helped a significant amount of businesses gain access to the capital they need to grow or cover operational costs.

As with any major financial decision, it’s important for entrepreneurs to carefully consider all of the potential pros and cons of this type of financing, which is actually more like a sale transaction and less like a loan.

What is a Merchant Cash Advance and When Can Businesses Use One?

A Merchant Cash Advance (MCA) is a financial product that provides small businesses with a lump sum of cash upfront in exchange for a portion of their future sales. This type of funding is typically used by businesses that need quick access to cash and have a high volume of credit card transactions.

MCAs are often utilized for short-term financing needs, such as inventory purchases, equipment repairs, or cash flow gaps. They are especially useful for businesses that may not qualify for traditional loans due to a lack of collateral, lower credit scores, or those needing funds more quickly than a bank loan can provide.

Merchant Cash Advance: An Overview

Many financial experts have expressed concerns in recent years about the lack of regulation in the merchant cash advance industry.

Since it’s not technically a loan, it isn’t subject to the same rules that other banks and online lenders have to adhere to. So it can come at a major cost and entail some terms that are less than favorable for small businesses.

However, the process also contains significantly fewer requirements and roadblocks than you’d find when trying to work with a traditional bank. So these services can provide additional options to some small businesses that aren’t able to access traditional financing.

Essentially, this type of transaction can help businesses in select situations. But it isn’t right for everyone. In order to make the best possible decision for your business, you first need to understand exactly what a merchant cash advance entails so you can determine whether or not it really fills a major financial need for your company.

When asking the question, What is a merchant cash advance? you should start by understanding what financing options are available for your business. Financing your small business is about having the right information to make a choice that suits your circumstances.

The merchant cash advance is perfect for businesses that meet certain criteria. Small Business Trends spoke with Hanna Kassis from Segway Financial about who should use this financial tool and how it should go about it.

Financing with a Merchant Cash Advance

merchant cash advance info

So what is a merchant cash advance exactly and how can it help your business?

“A merchant cash advance is a one time capital infusion in the form of a lump sum into a business,” Kassis says. “This is in exchange for a fixed royalty over a fixed period of time.”

Like other financing products, the merchant cash advance has a best case scenario where small business is concerned. These are best for the short term. They rely on the business’s cash flow so there’s no collateral required.

Typically, the funding amount is based on a one month average of bank deposits or credit card swipes. In other words you’ll need to have a steady and sufficient revenue history to apply for one of these. Small businesses can often get the money quickly within one to three days.

Generally, the amounts are between U.S. $60,000 and U.S. $70,000. However, you need to have steady monthly revenue of $10,000 a month to qualify.

More Merchant Cash Advance Info

Here is some more merchant cash advance info you may find helpful.

merchant cash advance info

Kassis also says there’s a specific set of small businesses that benefit the most from a merchant cash advance.

“You need to have a clear path to revenue if you’re going to take on this money,” he says adding that business owners need to be ready for a squeeze in their cash flow.

“All of a sudden you’re giving up 10 to 20 percent of every dollar received,” he says.

Kasis suggests there are a few boxes to check to make sure before taking one of these advances you can pay the money back. Buying inventory and flipping it works. Or, you can time a merchant cash advance to cover the slow season when you are fairly certain historically better revenues are ahead.

What Kind of Business Would a Merchant Cash Advance be Good For?

merchant cash advance info

So what would be an example of a good merchant cash advance business?

“This is for new businesses and ones that haven’t been in business for 6 months as well as businesses with an owner FICO below 600,” Kassis says. A cash advance is also a good choice for shop owners without many hard assets.

It’s a good idea for industries with a high number of transactions per month like restaurants, bars and a lot of B2C companies like retail and even nail salons. One of the criteria is being able to forecast a steady flow of customers.

In any case, it’s important to get as much merchant cash advance info as you can before deciding if this funding option is right for you.

merchant cash advance info

When is the Merchant Cash Advance Popular?

If you’re still not sure whether your company would be a good merchant cash advance business, consider this.

The merchant cash advance is also a good choice for businesses that can count on a cyclical revenue stream. Kassis says there’s a spike in companies looking for merchant cash advances ahead of holiday seasons.

Here are some other situations when a merchant cash advance is popular:

  • Ahead of Peak Seasons: Many businesses, like those in retail or hospitality, experience seasonal peaks and need extra capital to stock up on inventory, hire additional staff, or cover other expenses to prepare for the rush.
  • Emergency Situations: Unexpected situations like equipment breakdown, urgent repairs, or a sudden opportunity to purchase inventory at a discount may arise. A merchant cash advance can provide quick access to funds to address these needs.
  • New Product Launches: Businesses launching a new product or service often need additional capital for marketing, production, and other related costs. A merchant cash advance can provide the necessary funds in a short amount of time.
  • Cash Flow Gaps: Some businesses experience gaps in cash flow due to late payments from customers, unexpected expenses, or other reasons. A merchant cash advance can help bridge these gaps and keep the business running smoothly.

Why is the Merchant Cash Advance a Good Choice

A merchant cash advance can be a good choice for several reasons:

merchant cash advance info

  • Speed: Let’s say you’re launching a new product line or you need some extra money to get a new client set up. The merchant cash advance is the perfect choice because you can get under $100,000 on the same day in some cases. This speed is crucial for businesses that need quick access to cash to take advantage of an opportunity or address an urgent need.
  • Ease of Application: It’s a great financial Band-Aid if there is a broken water pipe in your restaurant that needs to be fixed quickly. Best of all, small businesses only need to fill out an application and supply four months’ worth of bank statements to get going. The application process is much simpler and quicker than applying for a traditional loan, which often requires a lot of paperwork and time.
  • No Collateral Required: Unlike traditional loans, a merchant cash advance is based on your business’s future credit card sales, so there is no need to put up any assets as collateral.
  • Flexible Repayment: Repayment is based on a percentage of your daily credit card sales, which means it will fluctuate with your business’s revenue. This can be helpful for businesses with variable or seasonal income.

Merchant Cash Advances: The Details

While the basics of merchant cash advances (MCAs) are clear, delving deeper into the nuances can help small business owners make an informed decision. MCAs, being tied closely to the business’s sales volumes, offer a unique form of flexibility not found in traditional loans.

This flexibility can be a double-edged sword. On one hand, during periods of high sales, businesses can pay back their advance more quickly, potentially reducing the overall cost of capital.

On the other hand, during slower periods, the reduced payment amounts can alleviate cash flow pressure, albeit extending the repayment period.

Evaluating the Costs of an MCA

Understanding the true cost of an MCA is crucial. The cost is often expressed in factor rates rather than interest rates, which can make it seem less expensive than it actually is.

A factor rate of 1.2 to 1.5 times the advance amount might not sound like much, but when converted into an annual percentage rate (APR), the costs can be quite high. Businesses should carefully calculate the APR of an MCA and compare it with other financing options to fully grasp the financial implications.

The Right Time for an MCA

Identifying the perfect timing for taking an MCA is another critical aspect that warrants deeper exploration. Beyond the scenarios previously mentioned, such as ahead of peak seasons or for emergency funding, MCAs can also be strategic for capturing time-sensitive business opportunities.

For example, if a competitor is going out of business and selling inventory at a steep discount, an MCA could provide the quick cash needed to purchase this inventory and potentially expand market share.

Moreover, businesses undergoing a significant pivot or expansion may find MCAs particularly useful. When traditional banks may be hesitant to lend due to the perceived risk, an MCA provides the necessary funds without the need for extensive documentation and approval processes.

This can be especially beneficial for businesses in fast-moving industries where speed to market is critical.

A Step-by-Step Guide to Applying for a Merchant Cash Advance

  1. Evaluate Your Cash Flow: Before applying, assess your business’s average monthly sales to ensure they meet the minimum requirement for an MCA. This will also help you understand how much you could realistically borrow and repay.
  2. Gather Required Documents: Typically, you’ll need to provide several months of bank and credit card processing statements. Preparing these documents in advance can speed up the application process.
  3. Choose a Reputable Provider: Research and select a merchant cash advance provider with favorable reviews and transparent terms. Consider their factor rates, repayment methods, and any additional fees.
  4. Submit Your Application: Complete the application process by submitting all required documents. Many providers offer online applications, making this process quick and efficient.
  5. Review the Offer: Once approved, you’ll receive an offer outlining the advance amount, factor rate, and repayment terms. Carefully review these terms to ensure they align with your business’s financial situation and goals.
  6. Use the Funds Wisely: Upon receiving the funds, use them for the intended purpose, whether it’s buying inventory, covering emergency expenses, or investing in growth opportunities. Strategic use of the funds can help maximize the return on your investment.
  7. Plan for Repayment: Since repayment is tied to daily sales, monitor your sales closely and adjust business operations if needed to ensure smooth repayment.

By taking these steps, small business owners can navigate the complexities of merchant cash advances and make a decision that best suits their financial needs and business goals.

Merchant Cash Advance Key Takeaways

AspectMerchant Cash Advance
Popularity1 million open accounts. Less popular than credit cards, term loans, or factoring but still significant.
NatureMore like a sale transaction, less like a loan.
RegulationLess regulation compared to banks and online lenders.
RequirementsFewer requirements and roadblocks compared to traditional banks.
SuitabilitySuitable for businesses in select situations; not right for everyone.
What It IsA one-time capital infusion in exchange for a fixed royalty over a fixed period of time.
Best Case ScenarioShort-term needs, no collateral required, based on business's cash flow.
Funding AmountTypically between $60,000 and $70,000, but requires steady monthly revenue of $10,000 to qualify.
Suitable BusinessesNew businesses, businesses in operation for less than 6 months, owner FICO below 600, B2C companies.
Use CasesAhead of peak seasons, emergency situations, new product launches, cash flow gaps.
Key ConsiderationsSpeed, ease of application, no collateral required, flexible repayment.

So when asking the question, What is a merchant cash advance? start with a clear understanding of how this funding option to help your  small business survive and thrive.

Image: Segway Financial

Rob Starr Rob Starr is a staff writer for Small Business Trends and has been a member of the team for 7 years. He is a graduate of Ryerson University in Toronto with a Bachelor of Journalism degree. His print credentials include employment with various Toronto area newspapers and three works of fiction: The Apple Lady (2004), Creekwater (2006) and Sophistry By Degrees (2008) published by Stonegarden Press In California.