An MCA loan or merchant cash advance is a type of alternative financing that can help business owners cover expenses or enhance their working capital. An MCA is a fast business loan that is technically different from traditional funding. If you want to take a step towards your long-term goals, this short-term solution is likely what you need to get you started.
Startups and small businesses can benefit from merchant cash advances in that the funding is quick. It is also typically without the rigorous qualification process of a traditional loan. This innovative product is perfect for borrowers with little to no assets but who have regular card transactions.
MCAs can get deposited into your account within the same day or the next day. Booster Financial evaluates risk and criteria depending on our standards set to make funding pain-free for borrowing businesses. You can start by learning about MCAs and discovering if they can meet your needs.
What is an MCA loan?
Merchant cash advances are not a loan per se since it follows a different set of rules and regulations outside of traditional financing. Rather, it allows business owners to secure extra funds by getting an advance against future sales via debit or credit card. The MCA is generally a lump sum funded upfront to the borrower upon approval.
Essentially, MCAs are a fast business loan designed to give businesses with poor credit or no credit history a chance at funding. These companies often cannot qualify for bank loans or other forms of financing. A business cash advance focuses on sales instead of credit score. It’s ideal for an enterprise that sees a high volume of credit or debit card sales.
Interest rates for an MCA loan can vary depending on the lending agency. It’s crucial to remember, however, that this financing type comes with a high risk. It is usually more expensive and not the best choice when trying to get out of debt.
How an MCA works
If you have a small business or startup, finding yourself in a financial pinch at some point requires you to seek additional funds. You likely won’t have the same opportunities as big and established companies, but you can try applying for MCAs. A lender provides merchant cash advance in the form of a lump sum capital that you need to repay using your future credit or debit card sales plus fees.
Every MCA contract comes with stipulations that you need to follow strictly. Otherwise, you can find yourself falling deeper into debt.
The advance amount is the agreed-upon lump sum that you as the borrower can get from the lender. You must carefully assess the advance amount you need before you sign any contract. Before deciding, you should be 100% sure that it is affordable and easy to repay given your circumstances.
You can opt to get a merchant cash advance that is greater, equal to, or less than your monthly revenue. However, you should choose an amount that you can comfortably deduct from your daily or weekly sales.
Here’s the thing with an MCA loan—the amount you must pay back is always larger than what you received. Merchant cash advance providers charge a factor, which is an interest-like fee, on top of the money you owe. Some lenders set a much higher factor rate than what you can normally see on traditional financing options.
The holdback amount is the daily deduction for every card transaction. It is usually around 10-20% of your everyday card sales. This percentage is fixed until you can fully pay the amount you owe. You can repay this fast business loan more quickly if your enterprise has a steady stream of credit card transactions.
For example, if your MCA owes $10,000 at a 1.5 factor rate ($10,000 x 1.5 = $15,000), the cost of financing is at $5,000. Your daily payment will be around $500 if the holdback percentage is at 10%.
With MCAs, you can choose between two repayment schemes depending on which structure is ideal for your business.
Percentage of card sales
The traditional repayment structure is through deducting a daily or weekly amount for every successful debit or credit card transaction. This scheme is different from other business loans since every payment is based on sales.
This scheme is a great choice for booming businesses that accept card sales regularly. When you get higher and more frequent card sales, you can also repay the advance faster.
Fixed bank account withdrawals
Some lenders choose to withdraw repayments directly from your business bank account. They deduct your debt automatically on a weekly or daily basis regardless of your total earnings. The lender calculates the fixed amount on account of your estimated monthly revenue.
When you choose this repayment structure, you will also have an idea of how long you’ll have to pay the cash advance. It’s an ideal option for enterprises that do not rely on credit card sales.
Rates and fees
An MCA loan has a factor rate instead of the traditional interest rate as one of its major fees. This number usually ranges from 1.1 to 1.5, which the lender assigns after assessing your business. It is highly variable per MCA provider, but here are some aspects that affect the factor rate you will receive:
- Years in business
- Financial statements
- Credit card and debit card transactions
- Personal credit score
If you are in industries considered high-risk by lending institutions such as in food and beverage, construction, or gaming, you might get a higher factor rate. Consequently, that means you will pay higher fees, too.
Aside from factor rates, you could still shoulder additional fees set by the merchant cash advance provider. Underwriting fees, administrative fees, and other charges can increase the total cost of this fast business loan. As such, you need to carefully review the offer and all its fees and rates before saying yes to the lender.
Although experts may warn borrowers regarding the potential risks of merchant cash advances, it’s one of the most flexible financing options in the market. You will find more freedom in choosing the loan amount and repayment term. Here are some cases where an MCA might prove useful.
Short-term cash flow support
At some point, your business can meet temporary hiccups in the cash flow. You might need extra funds for payroll, your lease, or the utility bills but don’t have enough cash to cover them all. In these cases, MCA is the quick-and-easy combination that fits your needs.
Some businesses like restaurants and retail stores need to have enough inventory to meet the demand. An MCA loan can be helpful if you want to purchase your supplies early. It’s also ideal for when supply chains struggle to keep up with your orders.
There are many situations business-wise that will require you to shell out some cash to prevent any interruptions in your workflow. For instance, any equipment can break down or a natural disaster like flooding can happen. You can use this fast business loan to deal with such costs promptly.
Covering other debt
An MCA might be the solution when you’re struggling to pay other debts and you’ve exhausted all means to gather money. These loans can stack up and cause you to pay more penalties than you can afford. A cash advance can help you manage this ordeal.
Additional working capital
Almost every aspect of your business requires money, which means you need to maintain healthy working capital. You can use a merchant cash advance to supplement your day-to-day budget. It provides you with more breathing room to accommodate unexpected costs without hurting your cash flow.
Pros and cons of MCA
Merchant cash advances are fast business loans that come with benefits and drawbacks like any other type of financing out there. You can refer to these pros and cons before deciding whether your business can handle acquiring this debt.
- Credit score not emphasized. Lenders grant you a cash advance based on your actual sales. Typically, the provider will not look deeply into your credit report or ask an inquiry to different bureaus.
- Easy application. Most online lenders review applications for MCA online. You don’t have to spend money and time going to banks several times to apply. They only typically require supporting documents like bank statements and your card processing merchant to assess your credit card or debit card sales.
- Fast approval. MCA providers have a speedy approval process, which can take only a few days to a week. You’ll have the funds sent directly to your business bank account as soon as you get approved.
- No collateral. A merchant cash advance is essentially an unsecured loan. You don’t need to put up collateral, which is an asset of value that the provider will seize should you fail to repay your debt.
- High costs. While the factor rate might not seem too high at first glance, you might find the annual percentage rate to be beyond what you expect. This number can reach well into triple digits, which indicates higher costs for an MCA loan compared to other funding types.
- No fixed payment. Saying yes to a merchant cash advance means giving the lender permission to get a cut of your daily card transactions. The payback amount and holdback amount can vary depending on your sales and the agreed terms.
- Not ideal for multiple payment businesses. If your enterprise uses different channels for payment other than card terminals, then cash advance might not be suitable for you.
Alternatives to MCA
While MCA is a great and fast business loan, it can lead you to have more debt than you can manage. Before signing that deal for a cash advance, you can explore other products in the market today. For example, you can seek more financing options that Booster Financial offers.
If you have been in business for at least a year and have a good credit score, you can try applying for a term loan for as much as $250,000. Instead of a factor rate, you will likely pay only a fixed interest rate and additional fees for administrative and processing costs.
Alternatively, you can open a business line of credit that provides you with flexible access to cash. The annual percentage rate of credit lines is generally less expensive than an MCA loan.
Frequently Asked Questions
What is MCA for?
You can use a merchant cash advance for virtually any purpose related to your business. When getting an MCA, it’s important to know where to spend it and use it promptly so that you can also earn the money back to pay the debt.
Is it good for my business?
The MCA is a fast business loan that fits companies receiving a steady stream of payments via credit or debit card. This setup allows the lender to implement the best plan to repay your cash advance before it burdens your cash flow.
Can I get an MCA with bad credit?
Some lenders are willing to work with you despite having a poor credit score. They only require transparency when it comes to your card sales. For this, they may require you to use their card terminal hardware for processing transactions.
Are MCAs bad?
As with any type of financing, an MCA comes with risks that you need to be wary of before signing that closing document. You should calculate the costs and only agree to an MCA loan if you are 100% sure that you can afford it.
Are MCAs legal?
Yes, merchant cash advances are legal despite not being technically considered a loan.
What if I cannot pay my MCA due?
An MCA obligates you to repay your debt according to the agreed upon terms of your contract. If you fail to meet your dues, the lender can take legal action against you. It’s crucial to communicate with your MCA provider if you think that you will be missing some payments.
The MCA loan is a fast business loan that can deliver a lot of benefits if you know how to use the funds properly. It grants short-term capital that you can use for a variety of purposes. However, as with any funding, you should only apply for one if you absolutely need it. You can talk to experts at Booster Financial today—we’ll help you decide whether an MCA is your next best financial move!
Understand Your Options
Find out more about the different finance opportunities available in your area and get funded today!Unsecured Financing Secured Financing