Merchant Cash Advance: Is It Right for Your Business?
Merchant cash advances (MCAs) offer rapid funding to assist businesses with immediate expenses or seasonal revenue fluctuations. Unlike traditional business loans, MCAs often feature relaxed eligibility requirements, but they commonly carry APRs that exceed triple digits. Generally, exploring alternative sources of small business financing is advisable before considering MCAs. Here’s what you should understand about merchant cash advances and how to determine if they suit your business needs.
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What is a merchant cash advance (MCA)?
A merchant cash advance (MCA) is an alternative form of small business financing where business owners receive upfront cash in exchange for a percentage of their future debit and credit card sales.
Due to its flexible nature, MCAs provide quick access to capital without stringent credit requirements or the need for collateral. While advantageous for addressing unforeseen expenses or emergencies, MCAs are generally considered expensive options for business funding.
How does a merchant cash advance (MCA) function? Unlike traditional loans, MCAs operate under distinct terms. When applying for an MCA, lenders evaluate your business’s monthly receipts to gauge financial stability and reliability. Although some lenders assess your business credit report, sales volume typically plays a larger role in determining the advance amount.
Rather than adhering to a conventional repayment schedule, MCA providers collect a predetermined percentage of your daily sales until the advance is fully paid off. This percentage, known as the “holdback rate” or “retrieval rate,” typically ranges from 5% to 20% depending on the lender.
There are three common methods for collecting the holdback rate:
Automatic deduction: The MCA lender collaborates with your credit card processors to deduct the agreed-upon percentage directly from your daily debit and credit card sales. Higher sales accelerate repayment, while lower revenue periods result in reduced payments to accommodate cash flow fluctuations.
Lockbox or trust account: All credit and debit card sales are routed through a separate account where the MCA company deducts its portion before transferring the remainder to your business bank account. This method mirrors automatic deduction but involves an intermediary account.
Direct ACH withholding: The MCA provider deducts fixed payments from your business checking account based on estimated monthly revenue. This method resembles a traditional term loan, allowing consistent repayment regardless of current sales volume.