What is a Merchant Cash Advance?
By Burrak Payments
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Looking for fast funding for your business? Learn what a merchant cash advance (MCA) is, how it works, pros, cons, and if it’s right for your business. Get insights into this flexible financing solution.
Introduction: What is a Merchant Cash Advance (MCA)?
A Merchant Cash Advance (MCA) is a type of alternative financing that allows businesses to get quick access to capital in exchange for a percentage of future credit card or debit card sales. Unlike traditional loans, MCAs are not structured as typical debt but as a cash advance against future earnings.
Merchant cash advances are particularly appealing to small and medium-sized businesses with high card sales but limited access to conventional loans due to poor credit or lack of collateral. Common industries that benefit from MCA include retail stores, restaurants, eCommerce, and service-based businesses.
How Does a Merchant Cash Advance Work?
With an MCA, a financing provider gives a business a lump sum—say £10,000—and in return, the business agrees to repay the advance via a percentage of its daily or weekly card sales, plus fees.
Step-by-Step Breakdown:
- Apply for the MCA with a provider.
- Submit recent credit card processing statements and bank statements.
- The lender evaluates your daily sales volume.
- Upon approval, you receive a lump sum in your account.
- Repayments begin automatically as a fixed percentage of future credit card sales (e.g., 10%-20%).
Key Terms in MCA
- Factor Rate – Typically ranges from 1.1 to 1.5. It determines the cost of the advance. For example, a £10,000 advance with a 1.3 factor rate means total repayment = £13,000.
- Holdback Percentage – The daily portion (e.g., 10%) of sales withheld for repayment.
- Repayment Term – Not fixed like traditional loans. It depends on your daily sales and continues until the full amount is repaid.
Who Should Consider a Merchant Cash Advance?
MCAs are ideal for:
- Businesses with consistent card sales.
- Companies that need immediate capital.
- Entrepreneurs with low credit scores or no collateral.
- Seasonal businesses needing short-term cash flow support.
Pros of Merchant Cash Advance
Fast Approval – Often within 24–48 hours.
No Collateral Needed – It’s unsecured.
Flexible Repayment – Tied to your daily sales.
No Fixed Monthly Payments – Easier to manage cash flow.
Accessible to Low Credit Score Holders – Credit isn’t the main factor.
Cons of Merchant Cash Advance
Higher Cost – APRs can be significantly higher than traditional loans.
Reduced Daily Cash Flow – Daily deductions can affect your operations.
Lack of Regulation – Less oversight compared to bank lending.
Not Ideal for Long-Term Financing – Better suited for short-term needs.
MCA Example Scenario
Imagine a restaurant needs £15,000 to buy new kitchen equipment. A lender offers a merchant cash advance with a 1.35 factor rate, meaning the total repayment is £20,250.
If the holdback percentage is 15% of daily sales, and the restaurant averages £1,000 in card sales per day, the daily repayment would be £150. That means it would take approximately 135 days to repay the full amount.
MCA vs Traditional Business Loans
| Feature | Merchant Cash Advance | Business Loan |
|---|---|---|
| Credit Check | Minimal | Usually Required |
| Time to Fund | 1–3 Days | 1–4 Weeks |
| Repayment Structure | Daily Card Sales % | Fixed Monthly Payments |
| Interest Rate | Factor Rate (High APR) | Fixed or Variable APR (Lower) |
| Collateral | Not Required | Often Required |
| Use Case | Short-Term, Fast Capital | Long-Term Growth, Expansion |
How to Qualify for a Merchant Cash Advance
While qualification criteria vary by provider, most require:
- 3–6 months of business activity
- At least £5,000–£10,000/month in card sales
- Valid business bank account
- No recent bankruptcies
Providers may review:
- Average daily card sales
- Business performance trends
- Industry risk profile
Top Industries Using MCAs
- Retail
- Restaurants & Cafes
- Salons & Spas
- Auto Repair Shops
- eCommerce Businesses
- Gyms & Fitness Studios
Alternatives to Merchant Cash Advance
- Business Line of Credit – Lower interest and flexible draw amounts.
- Invoice Financing – Advance based on unpaid customer invoices.
- Equipment Financing – Loan secured by the equipment itself.
- Small Business Loans (SBA or Bank) – Lower rates, but stricter qualification.
Tips to Manage MCA Responsibly
- Borrow Only What You Need – Don’t overestimate your requirements.
- Understand the True Cost – Know the factor rate and how it translates into APR.
- Keep Track of Daily Sales – Ensure cash flow is not overly strained.
- Compare Offers – Different lenders offer different terms—shop around.
- Plan for Seasonal Fluctuations – Especially important if sales vary monthly.
Is Merchant Cash Advance Right for You?
Use an MCA if:
- You need fast working capital.
- Your business has strong daily card sales.
- You prefer no fixed monthly payment pressure.
- You’ve been denied traditional financing options.
Avoid MCA if:
- You rely heavily on cash or checks, not cards.
- Your business is already struggling with cash flow.
- You need long-term or low-cost financing.
Conclusion: MCA Can Be a Lifeline, But Comes at a Cost
A Merchant Cash Advance can be a powerful tool to inject fast cash into your business, especially when traditional funding isn’t an option. But with high costs and daily repayments, it’s vital to evaluate whether it aligns with your business model and sales cycle.
Before signing any agreement, read the fine print, calculate the true cost, and ensure you’re working with a reputable provider like Burrak Payments that values transparency and trust.
https://www.takepayments.com/Need funding fast?
Contact Burrak Payments today to explore the right financing solution for your business. Visit: Takepayments
