Who should consider using them?

Merchant Cash Advances (MCAs) have developed a bad reputation, but they can serve a purpose and provide quick capital in an emergency. They provide funding (often within 24-48 hours) and lenient approval based on revenue. That makes them accessible for businesses with poor credit or urgent cash needs. 

However, they are highly expensive, with effective annual percentage rates (APRs) often exceeding 100-300% due to daily/weekly repayments and high factor fees. 

MCAs are not considered loans. They are a purchase of future revenues, paid for today. In other words, the MCA company pays you today, and is paid back with a fixed multiplier.

What is a fixed multiplier? It is a method of calculating what you pay back. It is simple, but often very expensive. An example of this would be 1.3, where $10,000 is borrowed, but $13,000 is paid back. That is a fixed factor fee that does not change. 

Factor fees are also an important consideration. A factor fee may be a discount rate. For example, at a discount rate of two percent, the merchant receives 98 percent of an invoice, but pays back 100 percent. 

Advantages of MCAs

• Fast access to capital: Funds are typically deposited within 24–48 hours.
• Easy approval/lower credit requirement: Lenders evaluate the funding application on revenue. Businesses with poor credit scores but consistent revenue can qualify. 
• Flexible repayments based on revenue: Payments are usually a percentage of daily sales, meaning you pay less when sales are low and more when they are high.
• No fixed collateral: Usually, no physical assets (like real estate) are required to secure the advance. 

MCAs are most suitable for small businesses with high credit card sales. These include, but are not limited to restaurants, service businesses, and retail stores that need rapid access to working capital (often within 24 – 48 hours). They are ideal for companies that do not qualify for traditional bank loans, have low credit scores, or face seasonal cash flow gaps, as repayment is based on future sales. Those are examples of businesses that use them.

Merchant Cash Advances may be suitable for

• High Credit/Debit Card Volume Businesses: Retail, restaurants, and hospitality businesses that process most sales via card are ideal.
• Businesses Needing Immediate Funding: Companies that need fast cash for payroll, inventory, or immediate opportunities rather than long-term growth.
• Borrowers with Low Credit Scores: Businesses that cannot secure traditional financing due to poor credit.
• Seasonal Businesses: Operations that need to cover cash flow during slow periods. While an MCA is not optimal compared to a line of credit, it could offer a solution if other financing isn’t available.
• High-Risk Industries: These are businesses that present regulatory, operational, or reputation risks. Major banks generally do not open accounts or make loans for businesses in these industries. The U.S. Small Business Administration (SBA) forbids certain industries from participating in SBA loan programs. However, some MCA providers may serve these industries.
  • Alcohol, Bars, or Nightclubs
  • Bail Bonds
  • Cannabis or CBD
  • Collection Agencies
  • Dating Sites/Matchmakers
  • Gambling
  • Guns and Weapons
  • Money Services such as Payday Loans, Remittance Providers, or Check Cashing Businesses
  • Pawn Shops
  • Sex or Adult Businesses
  • Tobacco
  • Vape Shops
• High-Risk Merchants: Banks and merchant service providers consider certain merchants a risk for operational reasons. MCA providers may or may not serve these merchants. Those include, but are not limited to these merchants.
  • Merchants who engage in international transactions
  • Charges for products or services that have not yet been delivered
  • Large volume; either a large average transaction rate or a large volume of transactions

Key Considerations

• Repayment Structure: Funds are repaid by taking a percentage of daily or weekly credit card sales. That’s right. Your account is autodebited daily. Daily. Or Weekly. That is a major reason why MCAs are more appropriate for a business with predictable sales. Businesses with uneven cash flow can run into trouble with MCAs.
• High Costs: MCAs often come with high fees. Factor rates generally range between 1.20 and 1.50.
• Repayment period: MCA companies want their money back fast. Normal repayment periods range from 3 to 18 months. The average duration is 6 to 9 months.
• Alternatives: If you need to borrow, use a comparison shopping platform. 

If you have credit issues but regular revenues and are in a position to pay back an advance quickly, an MCA could provide a financial bridge. It is a toll bridge, but if it can make future operations or expansion possible, you should consider it.

One Click Advisor offers many choices for small business funding, and those include MCAs. See what your options are today.

If you have questions or doubts about your financing options, just ask. Click here, set up a call, and we will answer your questions.

Whether it is an MCA or any other financing, we encourage you to enter any transaction as knowledgeable as possible.