There’s a major problem with traditional business loans: depending on the documents you need to submit and the lender you work with, processing and receiving your funds can anywhere from a few weeks to a few months. The U.S. Small Business Association has a number of detailed steps in the “life” of an SBA loan — and a majority of these steps occur before the funds are ever disbursed.
Ultimately, a traditional business loan isn't a great option when you can’t wait weeks for funding.
For small businesses that need cash immediately, a merchant cash advance (MCA) is a better choice. Successfully claiming a merchant cash advance on the same day requires you to understand the application process and funding terms. In this in-depth guide, you’ll discover the ins and outs of a merchant cash advance, how it works, and how you can use it to receive business cash on the same day.
What Is a Merchant Cash Advance?
A merchant cash advance is usually called a loan. But, technically, it’s a business cash advance related to the volume of your credit card transactions. Merchant cash advance providers allow small business owners to get an upfront lump sum and then repay it with a percentage of their sales.
MCAs are excellent options for small businesses with a high credit card sales volume and that need quick funding. You can also get an MCA if your small business has a cash emergency and needs business funding on the same day.
Your small business gets a cash advance, and then the provider takes a percentage of your sales from your credit card transactions. The repayments happen automatically, usually occurring every day.
Despite its obvious benefits, there’s one thing to keep in mind with this type of funding: you cannot get a merchant advance if your small business does not accept credit cards.
That being said, MCAs are a quick solution that can help tide over a short-term cash flow issue. That’s why these types of “business loans” fall within the category of short-term loan financing options, similar to a line of credit or term loans.
And because of the short-term, simplified nature of the loan, the approval is also pretty straightforward. If you meet the requirements, you can get business funding on the same day or within one or two days.
There are a few points business owners should keep in mind about MCAs:
Firstly, a fast solution to getting business cash means merchant cash advances are costly. You should only rely on them when they make sense, such as during a business emergency. Making a habit out of getting MCAs can cost your business a lot, and you could be sacrificing growth for short-term cash.
Secondly, interest rates for merchant cash advances are high and depend on a factor rate. The factor rate is a multiplier of your principal advance.
Let's look at an example of how this works.
If you get an MCA for $100,000 with a 1.5 factor rate, you need to repay $150,000.
You can find out the total amount you’ll need to repay by multiplying your principal, $100,000, with a factor rate of 1.5.
The factor amount and how much you have to repay daily depend on your business sales. If you have high business revenue, you can negotiate a lower factor rate, which would reduce your daily payments.
With MCAs, credit analysis and loan application doesn’t depend on your credit score – instead, this type of business financing assesses your eligibility based on credit card sales volume. So it’s an ideal option for owners with a low credit score who still need a merchant cash advance for quick funding.
And, remember: your small business loan will cost you less if you have strong credit card sales.
Types of Merchant Cash Advance Programs
The merchant cash advance industry has evolved since its initial start. Nowadays, you can choose from various MCA programs. Here are five of the most popular merchant cash advance programs.
A Standard Cash Advance is a lump sum delivered to your business bank account. The lump sum has a factor rate, and you will have to pay it back through a fixed percentage of your daily or weekly credit card sales and lockbox processor.
Consolidation and Buyouts are lump sums used to pay off current debts. The merchant cash provider buys out or consolidates your other loans. This allows you to make a single payment to one merchant instead of different lenders.
Reverse Consolidation helps you pay off debts when they become too numerous, but it’s different from a standard consolidation or buyout. The merchant cash provider gives you enough cash to pay your monthly debts and retains some of the money for their repayment. By paying out your other lenders every month, your debt decreases until only the merchant cash advance provider remains. This type of MCA program is completed over an extended period of time — usually six months or more.
Installment Funding is a merchant cash advance provided in different installments. The MCA provider might initially give you half of the money upfront, and then you get the rest in two other payments of 25%. This ensures that you receive the money you need to solve your cash flow issues, while the MCA lender doesn’t have to worry about the risk of you defaulting on the entire business loan.
Credit Card Splits are options if you complete most of your business transactions through credit cards instead of a lockbox processor. Your business bank account is linked to the merchant advance provider, and a percentage of your sales is deposited in the merchant's account every month. If you have a good sales month, the MCA provider receives a larger amount of money and vice versa.
The Advantages of Getting a Merchant Cash Advance
Because merchant cash advances are more expensive than a traditional business loan, as a business owner, you need to know what the advantages are so you can decide if the cost is worth it. After all, many financing options and small business loans can provide similar amounts of money with lower interest rates.
But, it’s not just about ease and speed: what merchant cash advances truly offer is flexibility, which can be invaluable if business owners are hit with certain situations.
Let's consider some of the advantages of these short-term financing options.
#1: Quick Access to Cash
One of the most significant selling points for merchant cash advances is how immediately your business cash is disbursed. Most MCAs have a quick application process, very few requirements in terms of credit scores or months in business, and you get the money on the same day or within one to two days.
Other types of loans, such as a line of credit or term loans, can take weeks or months to get funding. And that means you might not be approved in time for you to pay off debt or purchase equipment when you need it most.
#2: Flexible Repayment Terms
A merchant cash advance is directly tied to your volume of sales. You pay off a percentage of your daily, weekly, or monthly credit card revenue. So, if you're having a slower month, you pay less on your loan.
Other types of funding can have fixed payment schedules that require you to pay back a certain amount regardless of your business situation.
#3: You Don’t Need a Strong Credit Score
Many loan types require a good personal credit score as part of their eligibility criteria. Those with low credit scores usually cannot get traditional or long-term financing, so they have to resort to other options.
Merchant cash advances are one of the best options to offset a lower credit score. They do not require you to have a high personal or business credit score to be eligible for funding.
#4: Use the Money According to Your Needs
With traditional funding, a bank or other loan provider will ask you to specify what you’ll do with the loan you receive. You need to detail what you want the money for, whether it’s to pay back other debts, purchase equipment, or some other purpose.
With merchant cash advances, you don’t need to provide a reason or state that you’ll use the money for a specific purpose. You can simply say that you want to meet your business needs, and there will be no further inquiry about where your funding is going.
#5: No Collateral Required
While there are different loans that you can apply for with no collateral required, many will ask for bank statements, credit scores, and detailed financial documents to account for risk evaluation. But the nature of merchant cash advances is different — so they require minimal documentation and have zero collateral requirements.
The Potential Downsides to a Merchant Cash Advance
As with every type of funding, there are pros and cons. Merchant cash advances can help you meet your business needs quickly and without stringent requirements, but let's look at some of the potential limitations you should consider when trying to evaluate if this option is right for you.
#1: Expensive Funding
Costs for merchant cash advances can be significant. How much you’ll have to repay in total depends on what factor rate they charge you. Even a low factor rate means you might need to pay back 35% more than what you borrowed. In some cases, you could end up paying between 70% to 200% more.
#2: You Can Hurt Your Cash Flow
When you get this type of funding, you will need to make daily or weekly payments. If you're short on cash already, the merchant cash advance can be helpful upfront, but it might hurt you in the long run.
Before getting an MCA, consider how it will affect your business. Make sure you have a plan in place to manage your cash flow when a percentage of your sales revenue is automatically going toward repayment.
#3: Does Not Contribute to Building Business Credit
Merchant cash advance providers are not required to report your payment history to business credit bureaus because, technically, an MCA is not a loan. That means that when you're paying back an MCA, you aren't building up your official business credit.
If you’re a start-up, you should aim to build better credit. Doing this will open up doors to more funding avenues when you start to grow and scale.
#4: You Must Accept Credit Cards at Your Business
Many businesses, especially those just starting out, may not accept credit cards yet. Some small businesses may operate with cash or debit cards and have a lockbox processor. So if you don't accept credit card payments, you will not be eligible for the fast cash MCAs offer.
When Should You Get a Merchant Cash Advance?
Now that you understand the advantages and disadvantages of getting an MCA, you might wonder when it can be a practical funding choice. Many use cases justify getting an MCA in 24 hours, so let's look at a few of those situations.
- Help with temporary cash flow issues — MCAs help you solve your cash flow problems fast by providing funding in 24 hours or 48 hours.
- Purchase inventory at a huge discount — There might be a huge sale on inventory you need, and you don't have cash! An MCA can help you get the money you need so you save on your purchases.
- Unplanned expenses — Business can be unpredictable, and you might be facing an unexpected expense while being strapped for cash. The MCA will help you get that cash fast, especially if you are out of other funding options.
- Paying other debts due — If you have taken out another loan and your payments are coming due, getting a merchant cash advance can help you meet payment deadlines.
- Working capital — You might have a large business order coming in and need more working capital to meet it. You should get an MCA to help you with funding so you can increase your capacity.
The bottom line is, as a business owner, you should evaluate the benefits of getting fast cash through an MCA and the cost of having to pay it back.
Where Can You Get a Merchant Cash Advance on the Same Day?
When it comes to short-term loans and funding, traditional banks and lenders may not be much help. They usually have long and strenuous application processes, require extensive documentation and business history, do not provide funding if you have bad credit, and take too long to approve your funding.
If you're looking for same-day approval, you should look to alternative lenders or online merchant cash advance providers. They generally have a straightforward application process, are not discouraged by bad credit, and can approve your MCA within 24 hours.
Because you're looking for funding at such short notice, be careful about what you agree on. Different MCA providers will have different conditions, especially around factor rates and repayment terms.
Take some time to read through the reviews of any particular lender and carefully look at the terms and conditions of your MCA so you ensure you work with a reputable provider.
How to Apply for a Merchant Cash Advance
If you've been in business for a few months and find yourself in need of quick business cash — but you have bad credit — you should consider applying for a merchant cash advance. Applying for a short-term merchant cash advance is easier than applying for other business loans.
You won't need a lot of documents or collateral, and if everything is in order, you should get your money on the same day or within 48 hours.
Once you've identified a few credible merchant cash advance companies and picked one that you want to apply through, here is the process you should follow.
Step #1: Check Your Eligibility
Every merchant cash provider will have its own eligibility criteria, but you will find similarities, too. Most providers do not require you to have several years of business history. A few months of running your business will suffice.
They will look at the volume of transactions on your credit card to determine your factor rate more than anything else. If you meet the required volume and process transactions via credit card, you should be good to apply.
Step #2: Understand Your Credit Score
While most merchant cash advance providers don't place emphasis on your credit score, they will usually want to see a minimum score. Look at what score you have, and if it's larger than 550, you probably will be able to get started with the application process.
Keep in mind that a personal credit score of less than 550 might make it challenging to secure any type of business financing – but it’s definitely not impossible. Check out our guide to learn more about how to get a small business loan with “bad” credit.
Step #3. Gather Your Supporting Documents
Once you start your online application, you will have to input your personal and business information, as well as upload any supporting documents such as:
- Your personal and business bank statements for the last few months
- Your business's bank information
- Proof that you have been in business for at least a few months
- Proof of your annual gross sales
These documents will provide the necessary information to the MCA provider, and if everything is in order, you will get approval within a few hours.
Step #4. Understand the Terms and Conditions
If your merchant cash advance is approved, you will receive the terms and conditions. Before immediately signing up for the MCA to receive funding, take a look at the terms and conditions and specifically focus on:
- Payment frequency: how often will you have to repay your debt as a percentage of your revenues, which could be daily, weekly, or monthly.
- Factor rate: what interest rate or factor rate are you agreeing to, so how much money do you have to repay by the end of your agreement?
- Penalties: what monetary penalties will you incur if you miss a payment or default on your MCA loan?
- Time to funding: if you agree to receive the MCA, how long will it take for the money to get into your business bank account?
If your factor rate is exceptionally high, such as 1.75, and you have to repay an additional 75% of what you received, try to look at other providers. Depending on your bank statements and revenue, you might be able to get funded with a lower factor rate.
Step #5. Sign Your Agreement and Get Same Day Funding
After you've read the terms and conditions of your merchant cash advance, you can decide if you want to sign your agreement or reject the offer. If the conditions are favorable, you can sign the MCA agreement and wait for your funds to be deposited.
How Much Does a Merchant Cash Advance Cost?
A merchant cash advance is an excellent way to get fast funding, but it can end up costing a lot more than you imagined. The cost of your merchant cash advance depends on your factor rate and repayment frequency.
If you have a low factor rate and frequent payments, you can quickly pay off the advance without it hurting your business’s cash flow.
To understand how much MCA financing will cost you, let's explore an example.
Example of Merchant Cash Advance Costs
Assume that you get a merchant cash advance of $75,000, and the provider quotes you a 1.28 factor rate. This means that you will be paying 28% more than what you borrowed, which comes to $96,000.
$75,000 * 1.28 factor rate = $96,000 total payment
You will be repaying $21,000 more than what you received over a specific period of time.
Let's now assume that you have a revenue of $100,000 per month, which is around $3,333 per day.
$100,000 in revenue /30 days= $3,333 revenue per day
If the merchant cash advance provider wants you to pay 15% of your revenue every day, also called a holdback rate, you will have to pay $500 every day for 192 days.
$3,333 per day * 15% payment = $500 in daily payments
$96,000 total payment / $500 daily payment = 192 days to repay your MCA
The advantage of this type of payment is that your payments will adjust if you have a lower amount of revenue. For example, if you only make $3,000 in revenue on a single day, then your payment will be adjusted to $450. These variations will then affect how long you will have to repay your MCA.
How to Repay a Merchant Cash Advance
When business owners take out a merchant cash advance, they might assume it's similar to repaying other types of loans or lines of credit. In fact, it's pretty different!
Based on the agreed factor rate and holdback rate, your provider will make daily or weekly debits from your credit card transactions. This means that every day, a percentage of your revenue for the day will be transferred automatically to your MCA provider until you have paid the advance in full.
While other types of loans or lines of credit may have a grace period, which is the time between when you get the funds and when you start paying back the loan, merchant cash advances do not offer this cushion. That means repayment kicks in the day after you receive your business cash.
Types Of Repayment Structures
Any business owner who takes out a merchant cash advance has a few ways to repay it. Here are the top three ways you can repay your financing from a merchant cash advance.
Automated Clearing House (ACH) withdrawals are the standard way of repaying your MCA. These can be fixed payments, where the provider requires a fixed amount of money every day or week without considering any changes to your sales.
An ACH withdrawal can also be variable. In that case, you’ll pay a percentage of your credit card sales, and the payments change depending on your transactions.
Split Payments Processing
Split payments processing is one of the easiest ways of repaying your merchant cash advance because it's completely automated. The way it works is that your MCA provider teams up with your payments processor or asks you to switch to a particular processor.
Every time you make a sale, the processor deducts the merchant advance provider's payment and sends you the remainder.
For example, if one of your customers makes a payment of $1,000 and you have a merchant advance with a 15% holdback rate, your processor will hold $150 to send to your advance provider and send you $850.
Although it's one of the most convenient options for paying back a merchant cash advance, it can limit your payment processor choices. You could end up with a low-quality processor, depending on what company your MCA provider partners with.
Lock Box Withholding
With this type of repayment structure, the merchant cash provider will set up a special bank account, or a “lockbox,” in your name. However, they control it. You will have to route all your sales to this lockbox. Every day or week, you will leave the percentage owed to the provider in the lockbox and transfer your portion to your business account.
Lockbox withholding agreements are less common and have a lot of room for error and conflict. You will have to give complete control of your sales to another company, which can pose many problems for you as a business owner.
Additionally, delays with transfers can affect your cash flow. That might leave you vulnerable to a cash shortage as you repay your advance.
What Happens if You Cannot Repay Your Merchant Cash Advance?
Once you get a merchant cash advance, you must repay it in full. An inability to pay your MCA leads to you defaulting on your advance. Most MCA providers will have a term in their contract that allows them to pursue your business or personal assets if you cannot pay your advance.
Additionally, while MCA providers do not report your payments to credit bureaus to build credit, they will report a default. A default on your credit report will make it difficult for you to seek out other financing avenues in the future.
Different from other business loans, merchant cash advances allow you to get quick financing so you can solve cash flow issues, purchase inventory, or increase your working capital. You can get an MCA within 24 to 48 hours, but the quick funds disbursement comes at a cost.
Before you get an MCA, see if you can get other types of business loans or even lines of credit. If you’re looking for options, we have a variety of funding types that can help your business grow. Advance Point Capital is a small business funding marketplace where you can get a small business loan in as little as 24 hours.
Join more than 7,500 small businesses that have taken more than $375 million in business loans and funding with favorable loan terms. Call us today or get a quote and solve your cash flow problems with a provider you can trust!