Merchant Cash Advance: What Is an MCA, and How Does It Work?

by Kieran Daly
January 11, 2024
Merchant Cash Advance: What Is an MCA, and How Does It Work?

If you’re looking for quick cash to help you keep your small business operational, then you may have come across the term merchant cash advance, or MCA.

MCA's aren't traditional business loans, which means they often have an easier approval process. For businesses that have a lot of credit or debit card sales, this alternative financing option could be a solution.

Whatever your business needs, an MCA could help you get the cash you need. Keep reading to find out the answer to the question, “What is an MCA?” We’ll also cover how one works and alternatives to getting a merchant cash advance. 

What Is an MCA?

An MCA, or merchant cash advance, is a type of business financing where small business owners receive a lump sum of cash that is repaid based on future credit or debit card sales. The funding can be used to increase your working capital or cover cash flow gaps.

Merchant cash advances differ from traditional bank loans where the lender is repaid incrementally over a fixed time. Instead, with an MCA, the provider is paid back automatically with a portion of future credit card sales. Sometimes, this might be every day or every week.   

Because an MCA isn’t a loan, your payment history is not reported to credit bureaus, so it won’t help you build credit. Getting an MCA is often easier than getting more traditional loans, although you will need to pay fees that can sometimes be more than the current interest rates. 

How Does a Merchant Cash Advance Work?

OK, so now you know the answer to what an MCA is, so let’s look at the process of getting one and how it works.

Getting a merchant cash advance is relatively straightforward. The application process is often easier than applying for other types of traditional business loans. In many cases. you can fill out an online application and get approved within a few days. Here are the main steps to take when getting an MCA.

Apply and Sign a Contract

When you apply, merchant cash advance companies will look at your debit and credit card transactions to determine if you can pay them back. If they agree to give you the money, you’ll sign a contract that will lay out all of the repayment terms, such as the advance amount and how much will be held back from future sales to cover the MCA. 

Understand the Factor Rate

Instead of an interest rate, merchant cash advance providers charge a factor fee. This factor rate is multiplied by the entire loan amount. Rates vary but are usually somewhere between 1.2 and 1.5, which is equal to 120% to 150%. 

For example, if you get a merchant cash advance of $200,000 with a factor of 1.4, then the total that would need to be paid back would be $280,000 ($200,000 x 1.4). 

Start Paying Off the Advance

Once you receive the lump sum in your business bank account, you’ll need to start paying the money back to the MCA lender. Repayments often happen daily based on the sales you’ve made. An agreed-upon percentage of your sales (referred to as the holdback) will be given to the provider, which could temporarily lower your overall revenue until the entire advance amount plus factor fee is repaid.

Pros of Getting a Merchant Cash Advance

To help you decide if a merchant cash advance makes sense for your company, here are the pros of this type of business funding: 

  • Easy application process: The application process for an MCA is often done online and is easy to get. If you have a lot of debit and credit card transactions, then you can apply for this type of business financing.

  • Fast funding: With an MCA, approval times are fast, usually within a few days of applying. In other words, you may receive your funds in your bank account very quickly after submitting your application.

  • No need for collateral: Because MCA providers use future revenue as a means of guarantee, you don’t need to put up extra collateral to get funding. This means you don’t need to put forth (and risk losing) your real estate or other assets to back the loan like you might with other types of business loans.

  • Can apply with bad credit: MCA providers don’t require excellent or good credit, which means even if you have bad credit, you can still get the funding you need for your business.

Cons of Getting a Merchant Cash Advance

While there are many pros, there are also some cons to be aware of when it comes to getting a merchant cash advance: 

  • Weekly or daily repayments: With an MCA, you’ll need to make regular repayments from your daily sales. This could hurt your cash flow in the short term while you repay the money.

  • High fees: Because MCA providers use a factor fee rather than interest rates, you could end up paying more back than you would if you used other types of financing. 

  • Not a credit-builder: Because MCA’s aren’t reported to credit bureaus, it won’t help you rebuild your credit if you have a bad credit score or no credit history.

  • Only for debit or credit card payments: Since MCA’s are paid back with credit and debit card transactions, you will have to accept credit card payments. If you work in an industry that is cash- or check-heavy, then a merchant cash advance may not make sense.

Alternatives to a Merchant Cash Advance 

If you’re looking for financing options, a merchant cash advance isn’t the only choice. Here are some other alternatives for getting funding for your small business. 

SBA Loans 

SBA loans are probably the most popular type of business loan for startups and small businesses. That’s because these small business loans have favorable interest rates and are backed by the U.S. Small Business Administration.

However, getting an SBA loan can be a lengthy and cumbersome process, as the agency and partner financial institutions often require a lot of paperwork. And depending on the loan, you may need to meet certain criteria. 

Business Lines of Credit 

You can get a business line of credit from traditional or online lenders. With a business line of credit, you get access to revolving credit that can be used to grow your business any way you need. As you pay back the money you draw from, your credit reloads, and you get access to more funds. 

In many cases a business line of credit only requires a soft credit pull, meaning it won’t affect your personal credit score when you apply. 

Invoice Factoring 

This type of financing is similar to a merchant cash advance in that it is based on your future revenue. Instead of being based on future credit card sales, it is based on your outstanding invoices. The factoring company gives you a lump percentage of the total invoice amount and then collects the payment for the invoices. You receive the remainder of the invoiced amounts, minus any fees, once the company has collected all invoices. 

Working Capital Advances 

With a working capital advance, or business cash advance, the lump sum you receive is based on your cash flow rather than your credit card sales. In addition, you will often have a fixed repayment schedule rather than having to pay back a percentage of your future sales. This makes it a bit easier to manage cash flow. 

A working capital advance is usually a short-term loan meant to help businesses address their operational needs like inventory purchases or payroll. 

Is a Merchant Cash Advance Right for Your Business? 

Now that you know what an MCA is and how it works, you can decide if it’s something that makes sense for your small business. With a merchant cash advance, you can get a lump sum to help you grow your company and pay it back with your future credit and debit card sales. However, because MCA providers charge a factor fee, it can cost more than other types of financing options. 

Depending on your small business financing needs, it may make sense to seek other types of funding instead. At Backd, you can get a working capital advance of up to $2 million with flexible term lengths of up to 16 months. Or get a business line of credit of up to $750,000 with unlimited terms and great rates. 

Apply today, and find out if you qualify in just one business day.

What would you do with the right amount of capital?

Working Capital Advance

Easy payment structures offer amounts with fast turnaround, Simple and easy process to access working capital.

  • Flexible - no collateral required
  • $10K - $2M
  • Terms up to 16 months
  • Automatic daily or weekly, or semi-monthly payments

Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

  • Draw funds anytime
  • $10K - $750K
  • Unlimited terms, incredible rates
  • Soft credit pull that doesn't affect your credit score