Small businesses with less-than-stellar credit in need of fast and easy financing, with no collateral required, could benefit from a merchant cash advance loan (MCA loan). Here’s what an MCA loan is, how it works, and whether it’s right for you.
What Is MCA (Merchant Cash Advance) Loan?
While not technically a business loan, a merchant cash advance is an alternative type of business financing that provides a lump-sum payment based on future credit card or debit sales. It’s designed for small- and medium-sized businesses that receive revenue through credit card sales.
How Does an MCA Loan Work?
Typically, businesses use an MCA loan, also called MCA funding, to gain working capital and cover cash flow gaps. This is how these loans work:
- The business gets the money. After you and the financing company agree to the amount of cash needed, the funds are deposited into your business bank account.
- Fees are charged. Rather than an interest rate, financing companies usually charge what’s called a factor rate that’s multiplied by the whole loan amount. A $100,000 advance that carries a 1.4 factor rate could ultimately cost $140,000.
- Repayment begins. You start repaying the advance, daily or weekly, based on future sales. The “loan” is considered repaid when you’ve paid the borrowed amount in addition to any other fees. Usually, repayment terms are 18 months or fewer, depending on the financing company.
How to Repay an MCA?
There are a couple of ways a business can repay a merchant cash advance: via a percentage of credit card sales or a fixed payment.
Percentage of Sales
More commonly, repayment is structured as a percentage of your credit or debit card sales – usually between 10% and 20% of sales revenue. The precise amount you’ll repay will vary with each payment, since you’re paying a percentage.
Typically, you can use how much you make in sales to estimate your repayment term. However, that term could change if sales decrease at some point.
Fixed Withdrawals
While it’s less common, some lenders will withdraw a fixed amount straight from your business bank account either daily or weekly. Your estimated monthly sales are used to calculate the fixed amount, making it simple to determine how long it will take to repay the advance, in addition to fees. Note, though, that if sales at any point dip, you don’t have the flexibility to extend repayment terms.
What About Those Fees?
It’s important to note that merchant cash advance loans take their fees out up front. So, if your advance charges $1,000 in fees for a $7,000 cash advance, your business gets 46,000 in funding.
Typically, MCA financing fees include:
- Factor rates. You can expect to pay a rate of between 1.1 and 1.5, multiplied by the amount borrowed. This can render the cost of borrowing higher than for a conventional business loan.
- Funding fee. This fee, charged for reviewing the application, is either a percentage or flat fee, depending on the company.
- Origination fee. This fee, which is also commonly used with other business loans, is a percentage of the borrowed amount.
- Administrative fee. This is a flat fee that covers application processing or agreement maintenance.
Closing Thoughts
MCA loans are relatively easy to obtain, offer fast funding, and with no collateral needed. Before taking one out, though, consider whether you can handle an aggressive repayment schedule and associated fees. Also note that because MCAs don’t report payments to credit bureaus, this financing option won’t affect your credit standing.
