Each year, merchant cash advance issuers provide billions of dollars in cash advances to qualified merchants throughout the United States. This money is often used to pay for payroll expenses, business opportunities and inventory. This article is about how merchant cash advances work, and why they might be right for you.
If you’re a merchant who is searching for a quick funding solution for your business, take a few moments to explore a merchant cash advance (MCA). If your business generates credit card or debit card sales, an MCA might be beneficial to your business.
How Merchant Cash Advances Work
You will complete an application for an MCA and provide the supporting documents. Many MCA providers require applicants to provide a copy of a driver’s license, credit and debit card receipts, business history and annual revenue.
The MCA provider will review your application and documents to determine if you’re a good fit for a merchant cash advance. Once you’ve been approved for a merchant cash advance, the provider will require you to sign a loan agreement.
You’ll be required to provide a copy of a blank check for an active business account. The agreement gives your MCA provider the authority to automatically withdraw payments from your account.
Your MCA provider will deposit the merchant cash advance money into your business bank account. After you receive the money, you’re free to withdraw it as needed.
Since a merchant cash advance is a short-term loan, you’ll begin the repayment process quickly. Your merchant cash advance lender will deduct a portion of your daily credit card receipts.
The deductions will continue until you complete the repayment process. After you’ve finished repaying the original cash advance amount and fees, you will no longer be obligated to your MCA provider.
How Much Do Merchant Cash Advances Cost?
Although merchant cash advances can be convenient and easy, they can also be expensive. Depending on the amount of your merchant cash advance, you can expect to repay hundreds or thousands of dollars in addition to the original cash advance amount.
Merchant cash advance fees are based on factor rates. Typical factor rates range from 1.14 to 1.48. For a loan of $10,000 with a 1.40 factor rate, the entire loan will cost at least $14,000.
If you must sign an agreement for a merchant cash advance, you should choose an amount that’s affordable. Getting a large amount of cash could affect your ability to meet your other financial obligations.
On average, it takes merchants up to 9 months to repay the merchant cash advance. However, some merchants repay their advances in as little as 4 months or as many as 18 months. The length of time to repay the loan depends on your business and income.
How Merchant Cash Advances Affect a Business
When it comes to merchant cash advances, the most important things for business owners to focus on are the terms of the advance. These terms could have an impact on a business.
What Happens If You Default on a Merchant Cash Advance
One of the great things about business cash advances is that they are unsecured. It means you don’t need to offer collateral, and the loans are non-recourse. It means if the business suffers – and goes out of business, you aren’t held responsible for the merchant cash advance you took.
Until recently, many merchant cash advance companies used a COJ – confession of judgement – which made it so that they could automatically freeze your assets with little to no warning. In 2019-2020, immense scrutiny was faced by lenders who employed the use of a COJ. Now, many lenders no longer use this in order to recover the funds they gave to merchants.
Are there alternatives to a merchant cash advance?
There are many alternative financing options you can employ, such as:
- Term loans
- Invoice factoring
- Line of credit
- Hard money loans
- and more
Term loans are offered if you have great credit, but can take 1-2 week to process. There are many lenders who specialize in providing aggressive term loans to borrowers with a credit score over 700.
Lines of credit are a great way of getting financing. You typically need a credit score over 680 to qualify, with a great track record for your business. It might be possible to get a line of credit if you offer real estate collateral.