Merchant Cash Advance FAQs

A merchant cash advance (MCA) provides a lump sum of capital based on a business’s projected future sales, distinguishing it as an advance rather than a traditional loan. Typically short-term, MCAs are repaid through daily or weekly payments that include the advance amount and lender fees until the total is settled. Small business owners can apply for an MCA and receive funds deposited into their bank accounts on the same day of approval.

A business that utilizes a merchant cash advance will typically pay back 10% to 30% or more of the amount borrowed. This percentage is known as a factor rate, and it’s most commonly expressed in decimal form. For instance, a factor rate of 10% or 30% would be represented as 1.1 and 1.3, respectively.

Merchant cash advance providers assess risk and evaluate credit criteria differently compared to traditional loan lenders. Instead of heavily weighting personal and business credit scores, MCA providers focus on factors like historical deposits and average daily balances to predict future revenue and determine approval amounts.

Key underwriting criteria for top merchant cash advance companies include:

• Industry risk: Different industries pose varying levels of risk. Sectors with fluctuating sales cycles may carry higher risk, potentially resulting in higher factor rates.
• Business tenure: Usually businesses are required to have been operating for at least 6 months. Generally, newer businesses may face higher factor rates due to perceived risk.
• Sales performance and growth: Your business’s financial health and ability to repay is assessed based on sales performance and growth trends. Consistent sales and demonstrated growth history can lead to more favorable rates and terms.
• Business credit history: While less critical than for traditional loans, your business’s credit score still influences MCA terms. A higher business credit score typically correlates with lower factor rates, reflecting lower perceived risk.

What you’ll need to qualify:

• 
  Time in business
  4+ months
• 
  Annual revenue
  $100K+
• 
  Credit score
  500+

Pros

• Quick approval process
• Same-day funding available
• No collateral required
• Most credit scores qualify

Cons

• Higher fees
• Shorter repayment terms
• Daily or weekly repayment frequency

The total payment you make will be influenced by the specific program, the borrowed amount, and the repayment term. Nowadays, many MCA agreements are of the ACH variety.

Use our ACH merchant cash advance calculator to estimate the total cost of borrowing.

Merchant cash advances operate differently based on the specific type chosen.

Traditionally, MCAs are tailored for businesses with substantial debit and credit card transaction volumes. However, the product has evolved into a second program that caters to a broader spectrum of small businesses.

The distinction lies in the repayment method and how rates and eligibility are evaluated.

Traditional merchant cash advances

In a traditional cash advance agreement, a percentage of your daily or weekly credit and debit card sales are deducted, known as a holdback.

The repayment period usually spans from 3 to 24 months, without a fixed end date. The repayment pace is directly influenced by your credit card sales volume—the higher your sales, the quicker you can repay the advance.

For example, if your lender holds back 15% of your daily credit and debit card transactions, your MCA payments fluctuate with your sales fluctuations.

With a merchant cash advance, your payment will shift to the pace of your income, helping you avoid cash flow disruptions when sales are down.

Traditional cash advance requirements

Merchant cash advance (MCA) advance amounts are decided by forecasting future credit and debit card sales. The holdback percentage is then computed based on the advance sum and the anticipated repayment period. Holdback rates typically range from 10% to 20%, although they can vary significantly depending on the specific business and associated risks.

ACH merchant cash advances

Another type of merchant cash advance is referred to as an ACH MCA, which stands for automated clearing house withdrawal.

Under this arrangement, payments are predetermined and occur over a specified period. This entails that your daily or weekly payment remains constant regardless of your sales volume. Payments are automatically debited from the business owner’s linked bank account.

ACH merchant cash advance requirements

ACH advances are determined by a business’s overall projected revenue, rather than solely relying on credit card or debit card transaction totals. Consequently, this type of business advance is suitable for all small business owners, not just those with substantial credit and debit card sales.

Unlike traditional interest, which accumulates over time based on the remaining principal amount, merchant cash advance (MCA) fees are determined upfront at the time of origination. These fees are integrated into your scheduled payments and do not change. Whether you repay your advance in 4 months or 12 months, the total amount paid remains constant.

To illustrate how these rates impact your overall repayment, let’s consider a few examples:

Advance * Factor Rate = Total Payback Amount

The factor rate you’re quoted will depend on your industry, average monthly sales, the stability of those sales, the time you’ve been in business and other risk factors.

Unlike interest, which accrues over time based on the remaining principal balance, merchant cash advance (MCA) fees are calculated upfront at the time of origination. These fees are incorporated into your scheduled payments and remain fixed. Whether you repay your advance in 4 months or 12 months, the total amount paid remains constant.

To gain a clearer understanding of how these rates impact your total repayment, let’s examine a few examples:

The factor rate your business cash advance lender quotes you will depend on your industry, average monthly sales, the stability of those sales, the time you’ve been in business and other risk factors.