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What is a Merchant Cash Advance?

Summary

A Merchant Cash Advance (MCA) isn’t a loan, it’s an advance on a small business’ credit card revenue. You’ll learn about how this type of finance solution works, typical repayment, costs, and the submission process.

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What is a merchant cash advance?

A merchant cash advance, also known as a business cash advance, is financing based on your future credit card receivables. A merchant cash advance allows a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of the funds regularly flowing through the business’ merchant account. Merchant cash advances (MCAs) are not loans, they’re advances based on the future revenues or credit card sales of a business. A small business can apply for an MCA and have funds deposited into its account very quickly.

This type of merchant financing is paid daily as a percentage of your credit card sales. Therefore, if your sales are high, your advance is paid off faster and if sales are lower, your payment is lower. 

Get up to $500,000 in 12-72 hours

A merchant cash advance can help with:

  • Inventory purchases
  • Equipment needs
  • Marketing opportunities
  • Short-term capital needs
  • And more!

Cash Advance / Short-term Loans & Lender Risk

This Unsecured Debt “a.k.a.” Signature Loan

Merchant cash advance providers look at loan requests differently than a bank would. MCA providers looks at the daily credit card receipts to see if the business can pay back the advance in a timely manner. Small businesses are basically selling a small portion of their future credit card sales to get cash immediately for instant working capital.

Please remember, it is an advance and not a loan so you will pay more on this finance type. A merchant cash advance provider will often approve an advance for a business that might not qualify for a business loan, if they can show a steady influx of credit card payments over 3 months. Business owners should understand the terms being offered so they can make a good decision about the potential return on investment. 

Important

Merchant Cash Advances are not a long term solution, unless you are generating revenue that justifies the advance. You must have a strategy.

How does it work?

Usually, applicants go one company at a time applying for a cash advance. The business owner’s credit is pulled by each lender. With the Small Business Resource Network, you can get multiple offers with one simple application, then select the one that fits best.

Once you accept an offer, an agreement is made between the small business and the merchant cash advance provider regarding the advance amount, payback amount, and holdback percentage. When the repayment agreement is signed, the advance is transferred to the business’ bank account in exchange for a future percentage of receivables or credit card receipts.

Again, this type of merchant financing is paid daily as a percentage of your credit card sales. This is called a “holdback” and will continue until the advance is paid in full. If your sales are high, your advance is paid off faster and if sales are lower, your payment is lower giving you the flexibility you need to maintain operations during slow times.

MCA’s eliminates the collateral required for a traditional small business loans making them easy to get.

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The Cost of A Merchant Cash Advance

In general, cash advance providers, may require 20%-40% (or more) of the amount borrowed. This percentage is called a factor rate (1.20 – 1.40). Make sure that you understand your return on investment…make sure that the benefits outweigh the cost. If it doesn’t do not take the cash advance. Try re-allocating funds. I suggest pulling equity out of your commercial property with a “cash-out” refinance solution.

IMPORTANT: There is a difference between the holdback amount a small business pays every day (as a percentage of their credit card sales or receivables) and the repayment amount for the whole advance. For example, a holdback of 15%, and a repayment of 30%, so it’s important for the business owner to understand the distinction. Your NetworkCare Agent will be there to help you.

Holdbacks are based on:

  • Credit card volume,
  • How long it will take to repay the advance
  • How big the monthly receivables are.

Look at this advance scenario where the owner $10,000 and agrees to pay back $12,000. This means the payback, or factor rate, is 1.20 or 20% of the advance amount. Moving forward, the business agrees to have 15% of its credit card transactions withheld by the advance company (the holdback) until the $12,000 is collected. If the business is averaging $14,500 a month in credit card sales, approximately $2,175 would be withheld each month and the advance would be paid back in roughly five months. Average holdbacks are 10-20%

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When Should You Get a Merchant Cash Advance?

Business owners that:

  • need to access capital very quickly should apply.
  • have adequate cash flowing through their merchant account daily to make payments on the advance should apply.
  • have a loan purpose that can justify the potentially high expense of the advance should apply.

Many business owners purchase more inventory in anticipation of busy seasons and holidays. They understand that revenue generating activities will likely produce a high return on their investment. Many also use the cash advance to purchase needed equipment and for operation expansion.

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Here’s The application Process

The Small Business Resource Network provides same day approvals and funding for merchant cash advances. Funds are usually deposited in their account within two days.

What items are required to get a cash advance/short-term loan?

  • Valid driver’s license or other state-issued photo ID
  • Proof of revenue – 3 business bank and/or processing statements
  • Voided check from the account you want funded

How much money can I get?

You can get up to 15% of your annual revenue in one lump sum payment.

Is the amount based on my credit?

Absolutely not! The amount is based on how much revenue you generate. For example, if your business generated $500,000 in revenue last year, you can be approved for up to $75,000 and funded in 24-48 hours.

Businesses need working capital to survive. We have the best non-bank offers available.