Merchant Cash Advance: What You Need to Know

If your small business needs additional funds, but you don’t qualify for a business loan, you might be wondering what else you can do. Fortunately, traditional financing isn’t the only solution available. Business owners have numerous options at their fingertips, one of which is a merchant cash advance. Let’s take a look.

A Non-Loan Financing Solution

A merchant cash advance (also called an MCA) is a non-loan alternative to a conventional business loan. As the name suggests, it’s an advance that you receive in exchange for future sales.

The benefit to an MCA is that it offers quick financing. You can apply online and receive a decision often within a few days. Upon approval, funds typically hit your account in less than 24 hours. The downside, however, is that MCA providers charge a fee (called a factor rate) that can make the advance more expensive than conventional financing options.  

Understanding the Holdback

When you have a merchant cash advance, the provider takes a set percentage of your daily credit and debit card sales. The amount they take is known as the “holdback” percentage, which typically ranges between 10% and 20%. It’s a fixed percentage that they take until you repay the entire balance (plus fees).

The benefit to a fixed holdback percentage is that the amount the company takes every day varies with your sales. If you have a lot of card sales, they take more. If you have a bad day, however, they take less.

Holdback Vs. Factor Rate

When you take out a merchant cash advance, the provider applies a factor rate to the requested amount. That rate determines the fees you pay back in addition to the advance. For instance, if your advance is for $25,000 and the factor rate is 1.3, the total amount you owe becomes $32,500. Factor rates depend on several things, including your credit history, credit card statements, and other financial information. Rates may vary between companies (as will additional fees), so be sure to compare your options closely.

Determine the Best Solution for Your Business

If you need fast working capital or don’t qualify for traditional financing, you may benefit from a merchant cash advance. Keep in mind that while it does offer a quick solution, it is more expensive than a business loan. You’ll need to do your homework and compare your options to ensure you’re getting the best deal possible that will help your business succeed.