Small Business Financing: Understanding Merchant Cash Advances

By Angela Petteys

If you’re a small business owner trying to get funding for your business, there are more options available than ever before. One option to consider are merchant cash advances (MCAs); they are much faster and easier to apply for than typical bank loans.

Understanding MCAs

When a business owner decides to use a merchant cash advance, he or she sells a portion of their future receivables at a discount to an MCA provider, and the money can be used in the business right away to pay for a wide assortment of business expenses including payroll, buying inventory, sprucing up a storefront, making repairs to an office, developing a new product, marketing, and more.

In most cases, the transaction involves future credit and debit card sales, but some MCA providers will offer advances for other types of receivables such as cash. Depending on the nature of your business, a merchant cash advance can be a fast and easy way to get some extra money to get past a short-term, temporary situation.

If your business is a retail establishment or restaurant with a high volume of credit card transactions, it’s entirely possible you could apply for a merchant cash advance, be approved, and have it paid off in significantly less time than you’d be able to pay off a loan from a bank.

A unique advantage of merchant cash advances is that repayment can be somewhat flexible. While most other types of business funding require repayment in fixed amounts of money, a MCA provider can collect smaller amounts of money on slower business days and collect more on busier days.

Pros and Cons

Although you can get a merchant cash advance from many online lenders, it’s important to note that merchant cash advances are not technically loans. Since the MCA provider is buying a share of your future sales, merchant cash advances are considered transactions. And since these transactions aren’t loans, they can be easier for business owners with damaged credit or very little credit to obtain.

The downside to merchant cash advances not technically being classified as loans is that they aren’t covered by the same laws as loans--an MCA may have higher fees than a bank loan would have for the same dollar amount. In addition to the high fees that can come with a merchant cash advance, there may be additional fees, such as filing fees, administrative fees, underwriting fees, NSF fees, and account transfer fees.