What Are Merchant Cash Advances and Are They Right For You?

A merchant cash advance (MCA) is a lump-sum payment to a business in exchange for a percentage of future credit and debit card sales. Merchant cash advances are ideal for companies with high volumes of card transactions, like restaurants or retailers, and offer a flexible finance solution when traditional loans may not be viable.


If you’re a restauranteur, retailer, or other small business owner who does a lot of credit and debit card sales every month, a merchant cash advance can help you buy inventory and equipment, make payroll, or cover operating expenses. In this guide, we’ll explain how an MCA can help you and how to get one.

What Is a Merchant Cash Advance

A merchant cash advance is a financing option that provides businesses with swift access to cash. Unlike a traditional loan structure, an MCA allows businesses to get an upfront amount of money in exchange for a portion of their future sales. This form of financing is particularly attractive to companies with solid card transactions, such as restaurants or retailers, as repayment is directly tied to the business’s card sales volume.

The most significant advantage of an MCA is its convenience and flexibility. Repayment schedules aren’t fixed but adjust based on the company’s cash flow. This means during periods of slower business, the repayment amount is lower, and during more profitable times, the repayment increases. However, merchant cash advances also typically have higher costs than conventional loans.

How Merchant Cash Advances Work

When you get a merchant cash advance, an MCA provider gives your business an upfront sum of money. In return, you agree to repay that amount plus a fee from a percentage of your future credit and debit card sales. This percentage, known as the “holdback,” usually ranges from 5% to 20% depending on the amount of advance, the payback period, and the business’s monthly card sales volume.

After you receive your advance, each day, the business’s merchant account is debited by a pre-agreed percentage of its daily card transactions until the advance amount, plus fees and interest, is repaid in full. There’s no fixed end date for repaying the advance – the timeline fluctuates based on your card sales. If sales are high, you pay back the advance faster, and if sales are low, the repayment period gets longer.

Types of Businesses That Should Use Merchant Cash Advances

Merchant cash advances are typically most suitable for businesses with a high volume of credit and debit card transactions and a need for fast funding. They can provide a lifeline for companies that require immediate working capital but may not qualify for more traditional forms of lending. Below are some types of businesses that might find an MCA beneficial:

• Restaurants and cafes: These businesses typically generate a large volume of card transactions. The flexible repayment model of MCAs can also accommodate the seasonal fluctuations often experienced in the restaurant industry.
• Retail stores: Like restaurants, retail businesses usually have a high volume of card transactions. Retailers often need quick access to capital for inventory purchases, particularly during peak seasons. 
• Salons and spas: These establishments often deal with a steady stream of card transactions. An MCA could provide funds for expansion, purchasing new equipment, or hiring additional staff.
• Online businesses: E-commerce and other online businesses typically process payments almost exclusively via debit or credit cards. These businesses might find an MCA useful for expenses like marketing campaigns, website upgrades, or inventory expansion.
• Medical practices: Dental clinics, physician’s offices, and other medical practices often have consistent card transaction volumes and can use MCAs to invest in new equipment or cover other business-related expenses.

Pros and Cons of Merchant Cash Advances

While MCAs offer certain benefits, approach them cautiously due to their high costs. Businesses should weigh the pros and cons and consider all financing options before opting for a merchant cash advance.

Pros

Here are some of the most significant advantages of opting for an MCA:

• Fast access to funds: MCAs offer one of the fastest times to funding of any financial product on the market. The application process is usually straightforward and, if approved, businesses can receive funds in their account in as little as one business day. 
• Flexibility in repayment: An MCA’s repayment structure is tied to the business’s daily credit card transactions. This means that during times of lower sales, the business’s repayment amount will be less, providing some relief during slower periods. This flexibility is not typically found in traditional loan structures.
• No collateral required: Unlike traditional bank loans, MCAs are unsecured, meaning they do not require collateral. Businesses do not have to put any assets on the line, which can be a significant advantage for startups or smaller companies that might not have substantial assets.
• High approval rate: MCA providers typically focus more on a company’s daily sales than a credit score or years in business. This makes MCAs accessible to businesses with a less-than-perfect credit history or those that haven’t been operating for a long time.
• Use of funds: There are no restrictions on how a business can use the funds from an MCA. Whether for purchasing inventory, renovating the business premises, investing in new equipment, or covering unexpected expenses, the business can use the funds for anything that helps manage and grow the business.

Cons

Here are some of the significant disadvantages associated with MCAs:

• High cost: Merchant cash advances are relatively expensive compared to other forms of financing. The fees associated with an MCA can equate to an APR of 200% or more, making them one of the most expensive financing options available. 
• Daily repayments: While the flexibility of an MCA’s repayment schedule can be beneficial during times of lower sales, the daily withdrawal can also create cash flow problems. 
• No benefit to credit: Unlike traditional loans, repayment of an MCA does not help to improve a business’s credit rating because MCA providers typically don’t report to credit bureaus.
• Not regulated like loans: MCAs are not considered loans but are instead categorized as commercial transactions. As such, they’re not subject to the same regulations as traditional loans, providing fewer business protections. For example, MCA agreements often contain confusing terms and conditions, and the lack of standardized regulations can make it more difficult for businesses to fully understand what they’re agreeing to.

Given these cons, it’s crucial for businesses to fully understand the terms and impact of a merchant cash advance before proceeding. As with any form of financing, research and consider your options carefully before making a decision.