couple receiving merchant cash advance

The Pros and Cons of Merchant Cash Advances

Small businesses often need quick access to working capital for purchasing new equipment, meeting payroll, or making repairs. For those that do not have access to traditional sources of funding, one attractive option is a merchant cash advance (MCA). This article is a brief discussion of the pros and cons of a merchant cash advance.

What is a merchant cash advance?

Unlike a business loan that comes with a set repayment plan and interest charges, a merchant cash advance is based on a predetermined percentage of your future debit and credit cars sales. 

The merchant receives an upfront sum of money, minus certain fees, in exchange for a portion of future sales, and the advance is repaid through fixed daily debits directly from the merchant’s bank account.

Pros Of Merchant Cash Advances

The main benefit of a merchant cash advance is that it provides fast access to funds, whereas traditional loans can take weeks to obtain and come with strict approval criteria: good credit, a certain amount of provable revenue each month, and an established history. Once you are approved for an MCA, funds are typically deposited into your bank account in 24 to 48 hours. 

Another benefit of a merchant cash advance is that there are no fixed monthly payments. The advance is paid back as a fixed percentage of future sales, regardless of how low or high those sales are. Because sales tend to fluctuate month-to-month, many businesses struggle to meet monthly installments on bank loans. 

In addition, obtaining a loan from a bank or other lender typically requires the borrower to put up collateral. With a merchant cash advance, there is generally no collateral to be approved because the funder considers your current sales to determine how much to advance. It is worth noting, however, that it has become increasingly common for MCA providers to require personal guarantees in order to advance the funds. 

Cons of Merchant Cash Advances

While there are a number of benefits to merchant cash advances, there are also disadvantages. 

First, this is an expensive form of small business financing that involves higher rates and fees. Unlike an interest rate for a bank loan, a merchant cash advance is pegged to a factor rate which, when converted into an annualized percentage rate (APR), can be as high as 350 percent.

Another drawback to this alternative form of financing is that MCA funders recoup payments from your daily credit card receipts, which could lead to cash-flow shortfalls and jeopardize the future of your future. In addition, funders also place restrictions on your business operations, As an example, they may prohibit you from changing credit card processors or encouraging customers to pay in cash. 

Why This Matters

While a merchant cash advance can provide your business with quick access to working capital, this type of funding is only intended to be a short-term solution. Moreover, the consequences of defaulting on merchant cash are serious, potentially placing both your personal and business assets at risk.