"A merchant cash advance is a financial transaction between a business and an alternative financing company. The company purchases the business’ future receivables at a discounted rate, or, in other words, provides the business an advance on future revenue."
But what does that definition mean exactly? We’re glad you asked. Join us as we run through everything you ever wanted to know about merchant cash advances.When small business owners need emergency cash but don’t have the time or credit score to pursue a loan or grant, they look into alternative forms of financing, like:
- friends and family
- business credit cards
- merchant cash advances (MCAs)
But friends and family sometimes tire of the incessant “knocking” at the door for funds, and business credit cards get maxed out. When that happens, small business owners often take a closer look at MCAs.
That’s precisely what we’ll do here: examine the merchant cash advance and its function in your business. You’ll find information about what an MCA is and how it works, as well as potential advantages and disadvantages. You’ll also come across questions you might never have thought to ask—questions about buy rates, for instance, or the Uniform Commercial Code.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a financial transaction between you and an alternative financing company like Sky Bridge Business Funding. The company purchases your receivables at a discounted rate, essentially “advancing” your future revenue.
Is a Merchant Cash Advance a Loan?
A merchant cash advance is NOT a loan. It is a discounted advance of your revenue. Instead of borrowing money and paying back principal and interest over time, you sell your future receivables to the MCA company for a smaller amount of capital that you can access immediately.
For example, you sell $10,000 of future receivables for an advance of $7,500 from an MCA provider. Under the MCA agreement, a fixed daily amount will be deducted from your business bank account until the $10,000 is paid in full.
Is a Merchant Cash Advance the Same Thing as a Business Cash Advance?
Some MCA providers use the terms interchangeably. However, the two can mean different things, with different buy rates and terms.
- A merchant cash advance is paid daily, with a fixed amount deducted from your business bank account.
- A business cash advance sometimes requires you to pay a set percentage of total sales instead.
Are Merchant Cash Advances Different from Payday Cash Advances?
The two operate similarly but differ in purpose and application:
- Merchant cash advances serve a commercial purpose, meaning they’re only available to people running businesses with legitimate business emergencies and needs.
- Payday cash advances come to the aid of individuals. As such, they are for personal use alone.
How Does a Merchant Cash Advance Work?
A merchant cash advance “advances” you funds based on future sales. For example, if you need money to purchase wood for a fencing project but won’t be paid until the work is completed, you could seek, and most likely get, an MCA.
In terms of financial structuring, MCAs act as commercial transactions, not loans. They also are unsecured and use a factor rate (sometimes called a buy rate), which can be thought of as the cost of financing. For more information about how Sky Bridge MCAs work, visit our How It Works page.
What is a Factor Rate?
A factor rate represents the discount taken by the MCA provider buying your future revenue. If, for instance, you expect future receivables of $9,750 and are approved for an advance of $7,500, you would pay the MCA provider at a factor rate of 1.3.
The rate varies but generally falls somewhere between 1.1 and 1.5. The MCA provider will determine your specific rate based on a number of variables, including consistent monthly revenue, no negative balance days, and other debt obligations.
What Does Unsecured Capital Mean?
Banks and lending institutions sometimes say “uncollateralized” rather than “unsecured.” The words mean essentially the same thing, stating you aren’t required to put up collateral to secure funding. In that regard, MCAs differ entirely from loans. If you default on an MCA, the provider can’t come calling to collect your home or other personal assets.
Do Merchant Cash Advances Charge Interest?
No, they don’t. Because MCAs are advances of future revenues — and not loans — no interest is involved.
Do Merchant Cash Advances Have Penalties?
Penalties are sometimes possible, but it depends on your agreement with the MCA provider. Some attempt to reduce their risk by requiring a personal guarantee. In those instances, you could face penalties for failing to pay for the MCA. Other providers employ early repayment fees. Before committing to any MCA provider, you should ask about both items to protect your personal and commercial interests.
How Do I Figure out the Total Cost of a Merchant Cash Advance?
The math’s actually pretty simple. You multiply the MCA amount by the factor rate to figure out the “Total Purchased Receivables.”
Example: $7,500 (Merchant Cash Advance) x 1.3 (Factor Rate) = $9,750
That means you’ll pay $9,750 over the term set by you and your MCA provider.
Are Merchant Cash Advances Federally Regulated?
No, merchant cash advances are structured as commercial products rather than loans. As a result they don’t fall under the federal government’s jurisdiction. The Uniform Commercial Code, which varies by state, regulates MCAs instead.
What is the Uniform Commercial Code?
The Uniform Commercial Code, or UCC, encompasses a body of laws concerning commercial transactions in U.S. states and territories. The laws dictate processes and practices for things like borrowing money, writing leases and contracts, and selling products or services. U.S. states either adopt the UCC as-is or tweak it as needed.
Can I Get a Merchant Cash Advance?
Almost any small business owner can get a merchant cash advance if you meet some basic qualifications.
- Established business history. Most MCA providers, including Sky Bridge, require you to be in business for at least six months or a year. As a general rule, MCA providers do not provide funding to startups.
- Consistent revenue history. Most MCA providers require average monthly revenues of $10,000 or $15,000.
- Business bank account. Because MCAs are paid through precise, daily withdrawal amounts from a business bank account, you must have one in order to be approved for an advance.
The basic requirements make sense if you remember that an MCA is an advance on future receivables. The three items above demonstrate you can service the MCA, which gives the provider confidence in offering the deal.
Who Offers Merchant Cash Advances?
There are many merchant cash advance providers in the market. Typically, it’s best to work with a direct funder like Sky Bridge to lock in the best terms and quickest funding process. A number of brokers and independent sales operators (ISOs) work with small business owners to apply for MCAs, too.
Can I Get an MCA with Bad Credit?
Yes, you can. MCA providers usually look at your personal credit score, but they generally care more about your monthly sales projections and overall business health. Plus, some providers, including Sky Bridge, specialize in helping business owners with low credit scores.
What Do Funders Consider Before Approving Businesses for Merchant Cash Advances?
MCA providers primarily consider three factors:
- Your time in business
- Business profitability
- Recurring cash flow
They typically require that you be in business for at least one year and assess financial well being through bank statements, sales receipts, and tax returns.
How Much Money Can I Be Approved for?
MCAs come with no maximum limit, which means you can ask for four, five, and six digits. Whether or not you get those digits is the question. Approved MCA amounts are based on monthly cash flow and annual profit and loss (P&L) statements, not your desire. On average, most small business owners seek and receive an MCA somewhere between $7,500 and $20,000.
How Long Does It Take to Be Approved for a Merchant Cash Advance?
The Sky Bridge Automated Funding Program determines your approval within minutes. You should use it if seeking an MCA of $35,000 or less.
Larger amounts or more complex businesses can involve an approval period of 24 to 48 hours. To start that process, contact us today.
How Long Does It Take to Get the MCA Funds?
You should receive the advance the next business day. Because you provide your banking details when seeking approval, the MCA provider automatically sends the funds via ACH or bank wire transfer.
How Long Do I Have to Pay a Merchant Cash Advance?
Unlike loan products that feature rigid terms and conditions, an MCA comes with fluid ones. You pay a certain amount daily, returning more money when sales are good and returning less when sales are so-so. The fluctuation helps maintain steady cash flow, and if sales are really, really good, pays off the MCA in as few as three or four months. Most small business owners hover at eight and nine months.
How Do I Pay a Merchant Cash Advance?
The process can vary, but an MCA provider typically deducts a specific amount from your business bank account every day. That amount could be a set figure or a percentage of daily sales.
Why Do People Get Merchant Cash Advances?
Most people get a merchant cash advance to “bridge a gap.” They know sales are coming, but they need money, now, to repair a walk-in freezer or to make payroll. An MCA provides that, delivering money in the present that can be paid in the future (i.e., once the sales come in).
What is a Merchant Cash Advance Good for?
A merchant cash advance can be used for almost any purpose. Most small business owners, though, focus on true emergencies like a broken-down delivery truck or a tax payment to the IRS. Another common scenario involves opportunity. A small business owner sees a sale on much-needed building space and needs immediate capital to make a down payment on it.
Are There Any Disadvantages to Merchant Cash Advances?
You run into two main disadvantages:
- First, merchant cash advances are a somewhat expensive form of capital. As such, they should be used for short-term needs and emergencies.
- Second, the MCA could potentially restrict cash flow. Since the MCA provider deducts funds from your bank account daily, you might have to “cinch the belt” until the MCA’s paid off.
How Can I Apply for a Merchant Cash Advance?
That’s easy. You’re at the best place to apply for one. If you’ve been in business more than six months, check out our Automated Funding Solution. If, however, you have more advanced business needs and require more than $35,000, contact one of our specialists. They will work with you to build the right value solution.
Merchant cash advances are a great way to alleviate emergency cash flow problems. If you have any remaining questions, don’t hesitate to contact us today.