What Is a Merchant Cash Advance and How Does It Work?

Sometimes, a business owner needs working capital quickly. Traditional loans take weeks or even months to be approved, so what is a business owner in a time crunch to do?

Luckily, you have options.

When traditional loans just won’t do, many entrepreneurs turn to a lender that can give them a merchant cash advance. If you need to purchase inventory, handle unexpected renovations, or take care of any other task for your company, an MCA may be the right choice for you.

How an MCA Works

If your company accepts credit card payments, you may be eligible for financing through an MCA. Like traditional lenders, MCA lenders provide you with a lump sum that you can use to take care of your company’s financial needs. Unlike traditional lenders, you are not responsible for ensuring you pay one large payment each month. Instead, MCA lenders take a percentage of your credit card sales each day. Repayment begins as soon as you receive your funding, and the lender may take as much as 20 percent of each credit card sale. The length of time it takes to repay your loan depends on how much you borrowed and your average credit sales. Funding is determined based on previous months’ sales.

Advantages of Obtaining an MCA

Obtaining a merchant cash advance has several advantages over applying for a traditional loan. Perhaps most importantly, you do not need a strong credit score for an MCA the way you do for most other types of lending. As long as you have strong credit card sales in previous months, you are likely to receive financing. Additionally, since the application process is often online and requires few financial documents, funding occurs within a matter of days instead of weeks or months. Finally, the high borrowing limits include flexible payments. Since repayment is based on a percentage instead of a specific dollar amount, you don’t pay if you don’t make any credit card sales one day.

Although a merchant cash advance has numerous advantages, it is important to remember that the percentage you pay will vary. Additionally, since MCAs do not have an annual percentage rate, they use a factor rate instead, so expect to pay up to an additional 5 percent. If you do decide that an MCA is the right choice for your company, ensure you apply through a reputable lender that is licensed and has excellent reviews.

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