Merchant Cash Advance (MCA): Is It the Right Financing Option for Your Company?

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By Dzhingarov

A merchant cash advance is not a business loan, but rather an alternative financing option to traditional loans. There are several similarities in between the two, with a few key dissimilarities that make all the difference. In order to know whether or not a merchant cash advance is the right option for one’s business, it is important to first understand how it works exactly. Therefore, we will introduce the basic concept behind MCAs first.

How is an MCA Different from a Business Loan?

When applying for an MCA, the company in need of cash will receive the money they need (or at least a percentage of it) almost immediately after approval. However, instead of paying the cash advance plus interest back in monthly cash instalments, the company will be paying the MCA provider every time they conduct business and generate income from credit card transactions. The agreed-upon percentage will continue to be auto deducted from each transaction, until the total due plus interest amount is received in full.

Which Type of Businesses are MCAs for?

They are ideal for any company in need of urgent cash. The only exceptions would be brand-new establishments that have been in business for less than 6 months. This means that getting a merchant cash advance for a start up business can be tricky. Other than that, a company’s decision to choose merchant cash advance over business loan should be made based on whether the advantages that MCAs have over traditional loans are relevant to them. For example:

  • Merchant cash advance amounts are received almost instantly, post-approval.
  • Providers accept applications from businesses with bad credit, even when lenders are not likely to do so.
  • Providing copies of the business’s tax filing records may not be required.
  • Companies are not forced to pay when they have no income to speak of, allowing a more flexible repayment schedule.
  • Collaterals are not necessary either for getting an MCA approved.
  • There are no restrictions on how the MCA amount is used by the client, which is often an issue with standard business loans.
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How is the Percentage or Interest Rate Calculated?

Usually, MCAs are calculated and paid out by following the rules, as detailed next.

Factor Rate -A number between 1.10 – 1.5 is multiplied with the cash advance amount to get the total amount that the client must pay back to the MCA provider. For example: 1.2 (factor rate) x $100,000 (cash advance amount) = $120,000 (total amount owed).

Maximum Deduction Percentage – This is the maximum percentage that a merchant cash advance provider may charge on their client’s daily income from card transactions. How much they charge will vary depending on the provider, the cash advance amount, the factor rate charged, etc.

Do look out for the factor rate and percentage your provider is charging, though. Just like it is with instant business loans, merchant cash advances can get very expensive unless you are careful from the start.