A Small Business Owner's Guide to Merchant Cash Advances

Here at the Rules of Thumb blog from MoneyThumb, we try our best to keep our readers educated on issues that are important to you. In that vein, today's post will be very helpful to merchant cash advance lenders as well as to small business owners interested in learning more about how merchant cash advances for small businesses work.

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a cash advance given in return for a percentage of a business’ daily credit card receipts. MCA providers charge a cost of capital between 1.1x and 1.5x of the amount advanced. This results in a cost of capital that’s much higher than other small business loans.

How Merchant Cash Advances Work

With a merchant cash advance (MCA), the provider purchases a portion of your future daily credit card receipts, advancing you those funds upfront. The provider collects a percentage (8% to 30%) of your daily credit card receipts as payment until the factor rate (typically 1.1x to 1.5x of the amount advanced) is repaid.

There are three basic steps involved in the process of obtaining an MCA. It begins with applying for the MCA, which can be done online. From there, the MCA provider will tell you the terms that you are approved for, which includes the factor rate (ranging from 1.1x to 1.5x of the advance). If you agree to the terms, funding (up to $500,000) occurs within five days. The provider collects the holdback percentage (8% to 30%) daily, directly from your credit card processor, until the advance is repaid.

Merchant Cash Advance Costs, Terms, & Qualifications

Merchant cash advances (MCAs) typically range from $5,000 to $500,000 and have factor rates between 1.1x and 1.5x. Repayment is based on a holdback percentage that varies by lender and can range from 8% to 30%. There are minimal eligibility qualifications for MCAs, making them easier to obtain than most short-term financing solutions.

It is becoming more and more natural for small businesses to apply for merchant cash advances as an alternative to traditional financing options. We hope the article we have shared from Fit Small Business has been helpful to you in understanding exactly how the merchant cash advance industry works. The MoneyThumb team would appreciate it if you would share this Rules of Thumb blog post on your social media page so that others can learn about small business merchant cash advances. Thank you!