Merchant Cash Advance

Most businesses could use a little financial help from time to time, especially during the slower parts of the year when cash is not flowing as abundantly as other times. In cases like these, a loan can come in handy to cover various expenses. But there are other financial products that business owners have available to them, including a merchant cash advance.

What exactly is a merchant cash advance, and is it something you should take advantage of?

What is a Merchant Cash Advance (MCA)?

While a merchant cash advance is a way for business owners to access capital needed to run their businesses, it’s different than a traditional business loan. If a significant portion of your sales is paid for via credit and debit, you can use your future receivables to get an advance of funds. Simply put, a merchant cash advance is an advance based on future credit card sales from your business. It’s a great short-term financing solution for your company, especially if a traditional small business loan doesn’t meet your needs.

Do you know what working capital is, learn more here?

Requirements For a Merchant Cash Advance

  • You currently own a storefront business such as a restaurant, retail store, auto service station or similar
  • You accept either Visa, MasterCard, Amex or Debit
  • Process a minimum of $15,000 per month in combined Visa, MasterCard and debit sales
  • Have a minimum of 6 full months of processing history
  • Have no bankruptcies in the last 24 months

What Types of Businesses Qualify For a Merchant Cash Advance?

Just about any type of business that has customers who pay predominantly by credit card would find merchant cash advances useful. As long as you qualify and you have predictable earnings, this type of financing arrangement may prove to be effective.

Having said that, businesses that have a brick-and-mortar concept are better suited for this type of financing, as opposed to online-based businesses. Further, you’ll likely need to have a certain minimum credit and debit card sales per month to qualify and may need to have had your business in operation for a certain amount of time before qualifying. 

However, these financing tools may also be good for new businesses too, as long as you have some idea of what types of credit card payments you typically receive on average. 

If you don’t have many hard assets to be used as collateral, this is a great option as well, as your future receivables act as a form of collateral. 

How Does a Merchant Cash Advance Work?

With a merchant cash advance, an agreement will have to be made between you and the merchant cash advance provider in terms of the advance amount, the amount you have to repay, and the holdback percentage. When this contract is signed, the advanced funds will be deposited into your account in exchange for a future percentage of your business’ credit card receipts or receivables.

The agreed-upon percentage of your company’s daily revenues will be withheld by the merchant cash advance provider to repay them, which is known as the “holdback,” and will carry on until the entire advance amount is paid back in full. This holdback percentage is based on the amount of money your business gets, the amount of time it will take you to repay the advance amount, and the size of your monthly receivable. 

For instance, if the agreed-upon holdback rate is 15%, that means 15% of your credit card transactions would be withheld by the merchant cash advance provider until the full amount is repaid. 

Unlike a conventional loan, you pay back a merchant cash advance on your own time without necessarily having to adhere to a specific repayment schedule. There isn’t any rigid time period within which to repay the money in full. Instead, the lender will simply withhold a percentage of your daily sales until you’ve paid back your merchant advance. 

The speed at which you can repay the advance amount is based on how much business your company does every day. The more transactions you carry out, the faster you can pay back the advance. 

The opposite is also true, however: if your business makes fewer transactions, it can take longer to pay back the amount. Like most businesses, the number of daily transactions will change, so more can be paid back on some days, while on others, less will be paid back. 

Looking for more advice on alternative business funding options? Check out this article

Common Ways Business Owners Use Their Merchant Cash Advance

You can use the funds received from a merchant cash advance in a number of different ways. Some common uses for merchant cash advances can include:

  • Cover employee payroll
  • Pay for new inventory
  • Cover the cost of new equipment
  • Pay for utilities
  • Expand your business
  • Pay for marketing 
  • Any cost associated with the day-to-day operations

At the end of the day, it can be used for just about any expenses related to your business without any restriction.

Why an MCA Could Work For Your Business

A merchant cash advance could be great for your business if cash flow is an issue from time to time (learn how to increase your cash flow). If that’s the case, the funds obtained from a merchant cash advance may prove to be helpful. You don’t have to qualify for a conventional loan and you don’t have to come up with valuable assets to be used as collateral. 

Any costs that you need to cover that you may find difficult because you’re short of cash flow can be covered with the funds obtained from an MCA. This is especially helpful if your business is affected by seasonal changes and experiences certain slow times during the year that can negatively impact your cash flow. 

If you need access to capital quickly, have enough cash flowing through your business account every day to make payments to repay the advance, and the reason for obtaining these funds is justified, a merchant cash advance may be a great option. 

When Considering an MCA, be Cautious of…

  • Higher interest rates – Merchant cash advances tend to come with higher rates and fees compared to a traditional loan.
  • Reduced cash flow – Since a percentage of your credit card receivables will be withheld from the merchant cash advance provider to pay off the cash advance, your cash flow will be affected.
  • Lack of regulation – The rates and fees associated with a merchant cash advance aren’t regulated, so MCA providers essentially have the freedom to charge what they want.

Merchant Cash Advance Application Process

The application process for a merchant cash advance is not unlike any other type of loan. Certain things will need to be done in order to apply. For starters, you’ll need to supply the required information. You can expect to be asked for information such as your business number, social insurance number, several months of credit card payments, photo ID, business bank account number, and bank statements.

The application process takes a couple of hours to fill out and can be approved in as little as 48 hours. Once approved, you can expect the funds to be deposited into your business bank account in as quickly as 24 hours to be used as you see fit. 

If necessary, you may be required to set up credit card processors if you don’t already have them in place. Then, repayment through the merchant account will start automatically.

Check out these common business funding application mistakes and learn how to avoid them, click here.

Merchant Cash Advance FAQs

Is collateral required for an MCA?

No, collateral is not required. Since the merchant cash advance is covered by your future cash flow, you don’t need any valuable assets to collateral the advanced funds.

What’s the maximum amount that can be advanced?

Different merchant cash advance providers have different limits, though advances are typically made for anywhere between $5,000 to $50,000. 

What is the average holdback rate?

Again, this would vary from provider to provider, but the average range is between 8% to 30%. 

How long do I have to pay back the funds?

There is no fixed term.

Finding The Right Type of Business Funding

If cash flow is a problem for your business from time to time and you don’t want to go through the motions of applying for a traditional loan, a merchant cash advance might be a great option for you. Get in touch with Loans Canada today to discuss your options about which product best suits your business needs. 

Please take a look at the wide variety of industries where we can help:

  • Automotive
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  • Communications
  • Dry Cleaner
  • Florist
  • Gas Station
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  • Bar or Nightclub
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  • Distributor
  • Entertainment
  • Furniture
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  • Import/Export
  • Manufacturer
  • Restaurant
  • Services
  • Technology
  • Mobile Phone Dealers
  • Loans for Doctors
  • Hotel and Motel Loans
  • Loans of Liquor Stores
  • Dental Practice Financing
  • Financing for Salons
  • Loans for Attorneys and Lawyers
  • Financing for Insurance Agents
  • Financing for CPAs
  • Veterinaries
  • Wholesaler
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