merchant cash advance

What is a Merchant Cash Advance? (MCA) 2024 Update

A merchant cash advance (MCA) is money you borrow against your credit card processing income. It’s like an auto loan, but instead of buying a car, you’re using the money to run your business. You can use it for anything that helps you grow your company – payroll, inventory, marketing efforts, etc. The best part about MCA’s is they don’t have to be paid back with your own money.

This type of financing is a great option for businesses that do a high volume of credit card transactions and need a cash infusion quickly, but may not qualify for bank loans or other traditional business funding. In fact, most startups and small businesses use an MCA to get through the startup phase.

How do Merchant Cash Advances (MCA’s) Work?

Every MCA is different, but let’s walk through one example of how this financing might work for your company. This scenario assumes that you’ve been approved for a $10,000 advance and it will be deducted from every credit card transaction you process over the next three months:

  • Your credit card transaction volume for the month is $30,000 and you pay a 3% fee (or $900) to your merchant services provider.
  • This means that your MCA provider will advance you $9,000 for this month’s transactions and deduct the full $9,300 from your future credit card sales.
  • You will still receive $20,000 for your work this month and get to keep 3% of the total sale (or $600).
  • The end result is that you made $10,600 this month (before taxes) and received an advance for $9,000 – all without touching your personal bank account.

What are the Requirements to Qualify for an MCA?

This depends on which provider you choose, but in most cases, your company needs to meet certain minimum requirements:

  • Minimum 6 months of credit card processing history with a proven track record of success
  • Monthly processing volume of at least $10,000
  • A checking account that can be linked to your merchant account for automatic withdrawals

Can Any Business Qualify?

Yes and no. There are many providers who will not work with startups and new businesses, so we recommend speaking with a few companies before you apply. If you don’t qualify with one provider, there’s a good chance that another one will consider your business. And remember, you don’t have to work with the first company who offers you an advance – you can always compare rates and terms later on before making a final decision.

How does Merchant Cash Advance Financing Work?

The exact terms of every MCA are different, but generally it works like this:

  1. You apply for an MCA and are approved based on the information in your application.
  2. Every credit card transaction that you process is sent to your merchant services provider, who deducts a fee from each payment (this is typically around 3%).
  3. A portion of each deduction is sent to the MCA provider to pay back your advance.
  4. Your merchant services provider deposits the rest of the money (your profit) into your checking account every few days.
  5. Once you’ve paid back all of your MCA, you can withdraw everything in your account and keep 100% of your profits.

Are There Any Additional Fees?

Since MCA providers are advancing you money instead of giving you a bank loan, they need to charge something extra. There are typically four types of fees you should expect with an MCA:

  1. Origination Fee – The origination fee is the percentage of your total advance that’s paid every month until the MCA is paid off. For example, if you take out a $10,000 MCA and pay 3% each month ($300), your origination fee would be $1,000.
  2. Draw Period Fee – This monthly fee is usually about 9% of your total advance amount and is equal to the percentage of cash you can withdraw every day. For example, if you have a $10,000 advance and your draw period fee is 9%, that means that you can withdraw as much as $900 every day (before the MCA provider takes their fee).
  3. Monthly Minimum – There’s usually a minimum percentage of sales that you need to pay back before your MCA provider will make a withdrawal. If you don’t meet this threshold for a month, the difference is added to your total balance and needs to be paid back before you can withdraw anything else.
  4. Settlement Fee – If you pay off your MCA early, you’ll need to pay a settlement fee which is designed as a percentage of your total balance. For example, if you have a $10,000 MCA and pay it off after 6 months, your settlement fee might be $1,000 (or 10% of the remaining balance).

What Happens When my Business No Longer Qualifies for a Merchant Cash Advance (MCA)?

This depends on which provider you choose, but in most cases your MCA will automatically convert into a traditional bank loan after you pay back your advance. If you can’t qualify for an MCA, you’ll need to find alternative funding options.

What are the Benefits of Merchant Cash Advance (MCA)?

There are many reasons companies choose merchant cash advances instead of other forms of financing:

  • You get cash within a few days of application, so you don’t have to wait weeks or months to get the money you need
  • There are no monthly interest payments and your profits aren’t taxed like they would be with other types of financing (your provider is paid out through their processing fees)
  • All decision making and risk is carried by the MCA provider, so you don’t have to do anything besides process credit cards
  • You can pay your MCA back early, which will save you money on settlement fees and other charges

What are the Downsides of Merchant Cash Advance (MCA)?

Every business is different, but there are some things that may be worth considering before taking out an MCA:

  • You can’t get an MCA if you have bad credit or a low credit score.
  • To qualify for an MCA, your business needs to process at least $10,000 per month, so running a small shop is going to be difficult with this type of financing.
  • Draw period fees can be as high as 15%, which means you need to make a lot of sales before you start making money.
  • You’ll have a hard time getting an MCA if your business is new, under a year old or doesn’t have very many transactions every month.
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