A merchant cash advance allows a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of the funds regularly flowing through the business’ merchant account.
A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business. A small business can apply for an MCA and have an advance deposited into its account fairly quickly.
Rates on a merchant cash advance are typically higher than other small business loan options due to a higher risk factor for the lender. An MCA provider will often approve an advance for a business that might not qualify for a business loan but has a steady stream of revenue along with other factors that show strength in the business.
How Does a Merchant Cash Advance Work?
An agreement is made between the small business and the MCA provider regarding the advance amount, payback amount, and holdback percentage. Once an agreement is made, the advance is transferred to the business’ bank account in exchange for a future percentage of receivables or credit card receipts.
Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the MCA. This is called a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral required for a traditional small business loan.
Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. And, should transactions be lower on any given day, the draw from the merchant account will also be less. This means during times of slow business, the business’ payback is relative to their incoming merchant account deposits.
The application process isn’t as complicated as a traditional loan, which often makes the merchant cash advance approval process a faster option. Here are the typical steps a business needs to take:
1. Apply for the advance: The application is typically one or two pages and will require your social security number, business tax ID, and other information about your business.
2. Provide documentation: You will likely be asked for several months of credit card or payments processing data as well as bank statements.
3. Get approved: It could be as quick as 24 hours for your business to be approved for a merchant cash advance.
4. Set up the credit card processing: This type of funding may require the business to switch to a new credit card processor. It can be inconvenient to switch processors, but it is sometimes a necessary part of the approval for many MCA providers.
5. Finalize the details: To use the previous example described above, the funding details might be something like this: a small business is approved for $10,000 and required to pay back $13,000. The merchant account will be debited 15% every day until the entire $13,000 is repaid. Make sure you understand when payments will start, because it may be as quickly as the next business day.
6. Receive the funds: The money from the MCA will be deposited into the small business’ bank account and repayment via the merchant account will begin automatically.