Merchant Cash Advance: What It Is & How It Works

Merchant Cash Advance: What It Is & How It Works

If you own a small business, you are likely no stranger to the funding difficulties that come with the territory. However, there are recent trends in the industry that provide small businesses with viable financing options.

A merchant cash advance can provide you with greater flexibility and greater chances of approval than your typical bank loan. If you are not aware of these types of loans and their many benefits, here is everything you need to know about merchant cash advances.

What is a merchant cash advance?

As the name implies, a merchant cash advance (sometimes called a merchant loan) is an advance on future sales that functions as working capital as you get your small business up and running.

Merchant loans are great due to the fact that they are easy to approve for and have a quick turnaround time. More and more small businesses are turning to these types of loans for this reason as traditional bank loans can be a little more difficult to acquire for up and coming businesses.

Where did merchant cash advances come from?

Merchant cash advances have been a “mainstream” way of capitalizing for a long time. In 2004, merchant cash advances were all the rage. Providers provided capital to small and mid-sized businesses that were healthy but underserved by conventional lenders. The process was originally structured as a lump-sum payment to a business in exchange for a portion of future income.

Now, the concept of the merchant cash advance can be structured for you in a variety of ways, all characterized by short payout terms (usually less than 24 months) with fluctuating monthly payout amounts based on monthly receipts, rather than the inflexible, fixed payments and terms associated with conventional loans.

The cash advanced is not technically a loan, but the sale of money on the installment plan, almost like a rent-to-own system. There is no investigation of your personal credit, only an assessment of your monthly business income to make sure you can afford the payments.

What is the difference between a merchant loan and a bank loan?

There are many factors that come into play and knowing the difference between a merchant loan and a bank loan can be difficult. With this in mind, here are some helpful points for your consideration.

1. Qualifications and turnaround time

A merchant loan is typically easier to qualify for and will have a quicker turnaround time. When it comes to qualifying for a merchant loan, usually the only documents needed are bank statements and past credit card receipts.

A bank, however, will ask for collateral tax records, credit ratings, and more in addition to the documents required for a merchant loan.

In addition to requiring more to qualify, a bank loan will also have a longer turnaround time with sometimes taking months to qualify. On the other hand, a merchant loan can be qualified for quickly.

2. Funding flexibility

A merchant loan will typically be more flexible due to the fact that they technically aren’t actually loans. A more accurate way to describe a merchant loan is a cash advance. With a merchant cash advance, you are actually selling a portion of your future sales. This will grant you a great deal of flexibility in how you structure your loan.

On the other hand, a bank loan has strict usury laws that put a limit on how your funding can be structured. You will always be required to pay a set monthly amount, unlike a merchant cash advance that only requires you to pay a certain percentage of future sales.

3. Funding availability

In 2008, the United States saw a financial crisis that affected the availability of funding even to credit-worthy borrowers. During this time, merchant loans became a non-traditional alternative to borrowers that were affected by this financial crisis.

Merchant loans still provide a helpful option for those who are having difficulty finding financing with how easily borrowers can qualify. With the availability of funding they provide over bank loans, the advantage once again goes to merchant cash advances.

How is a merchant cash advance repaid?

This is where these loans are truly unique. A merchant cash advance is repaid through a percentage of your future sales. The average time of repayment can vary depending on the amount borrowed and the percentage of your interest rate.

However, you can expect them to take anywhere from 4 to 18 months to pay back. This is where it is important to choose the right merchant loan to suit your specific business needs.

How are merchant cash advance payments determined?

A great benefit of merchant loans is that the payments are flexible due to the fact that they fluctuate depending on your sales volume. If your business is going through a dry spell, you won’t have to worry about how you are going to pay off your working capital since you will have lower deductions from your sales during these times.

On the other hand, when your business is performing well, you will have the benefit of paying your loan off even quicker. Many up and coming merchants prefer these types of loans for their flexibility and ease of use as compared to other loan options.

What industries are merchant cash advances good for?

Merchant cash advances are great for small business and in particular, they are excellent for the following industries:

  • Retail: Many industries such as retail experience times where sales will go up and down. Maybe there is a slump after the holidays or there is a certain season that is particularly busy. This is where merchant loans can benefit these companies since payments can vary based on sales. If you are looking to start your own retail store, a merchant cash advance may be the right solution for you.
  • Restaurants: Another industry that benefits from MCAs is the restaurant industry. Restaurants often encounter unexpected costs associated with issues like equipment failure. When a business encounters unpredictable expenses, it is good to have a source of working capital that allows for some flexibility. This is why merchant loans are of great benefit to the restaurant industry.
  • Medical Services: The medical industry also has greatly benefited from merchant loans. Medical is another industry that deals with a lot of expensive equipment and it is equipment that you cannot afford to be without. There are instances where merchant cash advances are simply the best solution to cover these costs and allow for spending flexibility.

Additional merchant cash advance FAQs

Do I have to accept credit cards to qualify?

Yes. Merchant cash advance providers will look at your daily credit card receivables to determine the amount you are qualified for.

How is the money received?

Once you’re approved for the merchant cash advance amount the money will be deposited either as one lump sum into your bank account or as multiple, smaller, monthly deposits.

What is the maximum funding amount?

Most merchant cash advance providers cap your funding to $500,000. This is dependent on the provider you choose.

How much in credit card sales should I have?

As a general rule of thumb, merchant cash advance providers will look for at least $5,000 in credit sales each month.

How is the repayment amount determined?

The repayment amount is taken out as a fixed percentage, determined by your daily credit sales.

The bottom line

If you are looking for a funding option that provides easy qualification and quick turnaround time as well as plenty of funding availability and flexibility, you will likely find what you are looking for in a merchant loan.

Like any type of financing, the right option will depend on your specific needs and you need to be sure you are considering factors like revenue, cash flow, goals, and risk before you settle on the right type of loan for you.

However, there are many advantages to be found in getting a merchant loan. Do your homework and due diligence and you will find the option that is best for your growing business.

Good luck and happy hunting!

Merchant Lending with Tidal Commerce Get Started

Join the club.

Subscribe to our newsletter and get payment processing news & insights sent to your inbox.

You can unsubscribe at anytime.