Best Uses For A Merchant
Cash Advance

Last Updated on April 2, 2024

Shield Funding Team

Table of Contents

Need cash fast? Have your small business’ cash flows hit a bump in the road? 

If you need access to capital, and your customers pay primarily with credit cards, then a merchant cash advance, or “MCA,” could be the right loan product to get you through any temporary cash flow difficulties. Before you begin the application process, educating yourself about this funding option and its best uses will ensure success.

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What is a Merchant Cash Advance?

A merchant cash advance is a form of credit that small business owners use to access capital. Lenders fund MCA’s quickly, sometimes within a few days, because they require less paperwork and the underwriting process is less thorough than the underwriting for a loan. 

Unlike a business loan, it is not repaid with a monthly, fixed payment. It’s more akin to a cash advance on a credit card, only you are receiving an advance against credit card receipts instead of a predetermined credit limit. The funding provider takes a portion of your daily credit card sales until the advance is repaid in full. 

The ease and convenience of a merchant cash advance make them a great option for small business owners who need cash quickly. They’re best for short-term needs and opportunities that require fast cash. Why? Because the trade-off for the speed and convenience are higher interest rates that could make it difficult to manage future cash flow. Used wisely, however, they can help you meet your business objectives.

How Do Merchant Cash Advances Work?

When small business owners need cash in a hurry – to cover payroll, or to jump on an opportunity – they don’t have many options. It can take weeks to pull together the documentation to qualify for a small business loan and wait to find out if its been approved. This is where a merchant cash advance can help you out. 

To qualify for a merchant cash advance, the lender requests statements for your past few months credit card receipts and bank statements. After analyzing past sales data to predict your future sales, they advance cash based on their predictions. Going forward, they take a percentage of every day’s credit card sales until they’re repaid.

Merchant cash advance providers don’t charge a typical interest rate, like on a loan or credit card. They charge a factor rate, which is a multiplier of the principal advance. The factor rate is shown as 1.2 or 1.5. 

When a business takes out a merchant cash advance for $200,000 with a factor rate of 1.5, the total amount you’ll repay is $300,000 ($200,000 X 1.5). The cost of the advance is $100,000, and the size of the advance plus your creditworthiness and other factors will determine the daily percentage of your sales that the lender takes.

If you have strong sales, and high revenue, the advance will be repaid more quickly. If sales slow, it’ll take longer to pay off. Many small business owners like that the repayment schedule matches revenues because they’re not making a large, lump sum payment during a slow period. 

Because your sales volume matters more than your credit score, a merchant cash advance is a good loan product for applicants with bad credit. Strong sales can make up for a low credit score.

What are the Pros and Cons of Merchant Cash Advances?

Like any lending product, there are pros and cons to merchant cash advances. Knowing them will help guide you towards the best use of a MCA in your business.

Pros of a MCA

  • Fast access to cash – There’s no doubt about it, if you need cash within 24 hours, apply for a MCA.
  • Flexible repayment terms – Worried about fitting a large payment into your budget on the 15th of every month? MCA’s have flexible repayment terms. 
  • Can qualify with poor credit – If you have a credit score below 720, it’s difficult to qualify for a traditional bank loan. MCA’s help small business owners with poor credit get access to capital.
  • No restrictions on their use – If you apply for an equipment financing loan, a large business loan, or other form of financing, you might face restrictions on how you use the funds. With an MCA, the money is yours to do with what you want.
  • Don’t require collateral – Losing a key piece of equipment if you default on an equipment financing loan could harm your business. Merchant cash advances don’t require collateral, so you face less risk. 

Cons of a MCA

  • Extremely expensive (70% – 200% APR) – That factor rate can add up to a high APR. In the example above, the small business owner paid 200%. 
  • Minimum daily payment can hurt cash flow – After accepting an MCA, you’ll need to budget for how it will impact your cash flow. You can’t count on receiving 100% of your sales into your bank account every day, and the lender’s deductions could hurt your cash flow. 
  • Doesn’t help build business credit – Taking out a small business loan and making regular payments builds your business credit. Most funding providers don’t report your payments, or the MCA, to credit bureaus. You won’t get a credit bump from this lending product.
  • May lock-in merchant processor – In order to take their daily deductions, some merchant cash advance providers require that you work with a certain merchant processor. This could require that you switch providers, and a new processor could charge higher fees.
  • Must accept credit cards – MCA providers take their repayment each time you swipe a card – small business owners who don’t accept credit cards and/or who don’t do a high volume of sales in credit cards are unlikely to qualify for an advance.

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Terms and Features of Merchant Cash Advances

The features of a merchant cash advance include: quick approval and turnaround time, less documentation required to qualify for the loan, and quick access to cash. While terms will vary based on the lender, most will have similar features:

  • Advance amount — Lenders offer advances ranging from $2,500 to $1 million, but most advances fall between $5,000 and $500,000. 
  • Factor rate — On smaller advances this can be as low as 1.09, but it can go as high as 1.5 on larger advances. 
  • Repayment period — Range from three months to two years. 
  • Payment frequency — Usually done daily or weekly and most often repayment is automatic.
  • Percentage deduction of your future daily credit card sales— This can range from 5% to 20% of sales. 

While MCAs are quick and easy to get, the high cost may not make them the best decision for your business. You can pay up to 50% of the amount of what you borrowed, and the payment amount won’t change over time. There is no benefit to prepayment because the lender charges the flat fee regardless. 

Because of the drawbacks to a MCA, small business owners should have a clear purpose for the funds when they borrow. This will ensure borrowing success. 

Best Uses for a Merchant Cash Advance

Anytime you borrow, you need a plan. A plan for using the funds, and a plan for repayment. Due to the nature of a MCA, some intended uses are better for the funds than others. Some of the best uses for a MCA include: 

  • Fix temporary cash flow problems — if you’ve had an unexpected downturn in your cash flow, such as a customer not paying on time, and you need help covering payroll, utility bills, or your lease, a MCA is a quick and easy solution. 
  • Purchasing inventory at deep discount — many small businesses that depend with inventory to generate sales, such as restaurants or retailers, may want to purchase supplies early. It’s particularly helpful to pre0buy when supply chains are strained, and an MCA can make it possible. 
  • Unplanned expenses — if an important piece of equipment breaks or another emergency comes up, you can use a MCA to cover the costs of a repair or solve the emergency quickly. 
  • Paying off other debts — Has a balloon payment on a loan come due, and you lack the funds to cover it? If existing debt is coming due, and failure to make payments could rack up more penalties or higher interest rates, you can use the MCA to pay those off. 
  • Working capital — an MCA can help you get some breathing room in your regular day-to-day working capital if you’ve been struggling to cover rent, payroll, or utilities.
  • Remodeling or expanding – If it’s time to expand your coffee shop into the empty space next door and add a bakery, a MCA could turn that dream into a reality. Because repayment comes from existing sales you can use the funds for the remodel without worrying about having to make a large loan payment before the new space generates revenues.
  • Marketing and Advertising – Any good business owner knows that you need to attract new customers to both grow and replace customers who churn. Dips in sales, or the loss of an important customer, could be a sign that it’s time to invest in marketing. 

If you have the cash flow and credit card receipts to cover the deductions from your merchant account, an MCA will allow you to get financing and solve a problem quickly. But it should be considered a short-term financing solution — and an expensive one.

Which Companies Use Merchant Cash Advances the Most?

Merchant cash advances work best for industries and businesses that process a large volume of credit card sales. They’re most common in these industries: 

Restaurants – 

The restaurant industry is known for its ups and downs. Restaurant owners must often order and pay for food, liquor, and other necessary items before they generate any sales. Because the industry also transacts primarily in credit cards, a MCA is a natural fit. 

Retail Stores – 

Retailers also must stock up on inventory – particularly if there is seasonality to their sales. And, during slow periods, rent and utilities will still come due. Many customers pay with credit cards, so a merchant cash advance is often a good way for retailers to access capital. What’s more, since repayments match future credit card sales it’s easier to repay a MCA during slow periods. 

Auto Repair Shops – 

Auto repair shops depend upon their equipment to stay in business. Pledging it as collateral for a loan is risky, so auto repair shop owners may not want to approach banks for funding. If you need to order more parts, repair machinery, or make payroll, a merchant cash advance could be the solution. The high cost of auto repairs mean that your customers most likely pay with credit cards, so you could qualify for a MCA. 

Salons – 

When clients book a cut, color, massage, or other service at your salon, they likely pay by credit card. This would make it easy for you to qualify for  merchant cash advance. You could use the funds to upgrade stations, invest in more products to sell, or engage in more marketing. 

How to Qualify for a Merchant Cash Advance

Applying for a traditional business loan can be a discouraging experience for many small business owners. Most traditional lenders won’t work with you unless you have years in business. But to qualify for a merchant cash advance you only need a few months of history.

What you do need are a few months of credit card sales, with statements to support those sales. The amount and number of sales matters more than your time in business or credit profile. You’ll also need proof that you’re operating as a legal business, a driver’s license to prove your identity, and a few other pieces of verifying information. 

At Shield Funding, you can qualify for a merchant cash advance with as little as $8,000 a month in minimum monthly revenues and a credit score of just 500. Apply online or pick up the phone, MCA providers make it easy to fill out their application. 

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Can I Qualify for a MCA with Bad Credit?

Yes, you can! Because sales volume matters more to MCA providers than your credit score, you can borrow with a score as low as 500. Their ability to take automatic repayments also protects them from risk, though this means you’ll have to give them access to your merchant account.

How Do I Apply for a Merchant Cash Advance?

It’s fairly simple and straightforward to apply for a merchant cash advance. You’ll just have to demonstrate monthly credit card volume that meets the lender’s minimums. Lenders will ask for other documentation – such as proof of identity and that you operate a legal business – to approve the advance. You can apply over the phone or online.

How Does a Small Business Repay a Merchant Cash Advance?

If you’ve previously funded your business’ capital needs through small business loans, the method of repayment of a merchant cash advance could seem odd to you. Most MCA providers directly take a percentage of your daily sales to repay the advance (some debit your sales weekly, instead). There is no grace period, such as with a loan, and you begin making payments the day after the funds are disbursed.

MCA providers refer to the percentage of your sales that they deduct as a “holdback.” This amount is held back from your sales to repay the advance, and it’s typically between 10 to 20% of sales. The holdback percentage stays fixed until you’ve paid off the advance.

While the factor rate is a lump sum you’ll pay to borrow, the holdback percentage stays the same but the dollar amount can vary. For example, if you had $8,000 in sales on Monday and a holdback percentage of 15%, the MCA provider would hold back $1,200 of those sales. If Tuesday’s sales were only $3,000, they’d hold back $450. Due to this variation in daily deductions, you’ll need to keep a close eye on your cash flow. 

When applying for a MCA, ask if they’ll deduct their payments daily, weekly, or only on business days. It’s important to know exactly how the MCA repayment will impact your business. 

Is a Merchant Cash Advance Right for Your Small Business?

After you’ve thought long and hard about the pros and cons of merchant cash advances you might still be wondering if a MCA is right for your small business. A MCA allows small business owners to access capital quickly, but it can put your business in jeopardy if not managed carefully. Before accepting the advance, budget for its repayment, plan on the provider’s daily withdrawals, and have a clear plan for the funds.

Many businesses use this type of financing to see them through a short-term cash flow problem, but others use it to fund an opportunity to generate additional returns. This could include purchasing inventory that you’ll churn quickly for a high profit, or taking advantage of a discount. Perhaps a competitor is going out of business and you could scoop up their machinery and inventory for a song. 

A small business owner who uses a MCA successfully is one that uses it to support a return on investment generating activity, is mindful of its costs, and understands its costs in relation to the potential increase in investment. 

What are Your Options for Getting Out of a Merchant Cash Advance?

Let’s face it – we all make mistakes. And for some small business owners, the MCA they took out a few months ago might have been a mistake. If you picked a MCA because you had bad credit, a short business history, or needed money fast, you might not have read the fine print. Now, you could find yourself in a difficult financial position. 

The best option is to refinance the advance into a lower-interest small business loan. You could also take an advance against a credit card to pay it off. But if you chose a MCA due to poor credit, you still might not qualify for a small business loan. And credit card advances come with penalties and high interest rates, too. 

Another option is to apply for a larger MCA to pay off the first MCA, but that can get expensive. Loan stacking – taking out multiple credit products – can quickly burden your business with high interest payments. But, if you could use one, new MCA to pay off multiple credit products, it might be worth it. 

If you have a large balance of accounts receivable, inventory, or real estate, you could apply for an asset-backed loan. Using these assets as collateral, you could qualify for a loan at a lower interest rate and pay off the MCA. Because you’re pledging assets as collateral, you could still qualify with a lower credit score. But you could also lose those assets if you default.

What Happens if You Default on a Merchant Cash Advance?

It’s never a good idea to default on any loan, credit card, or merchant cash advance. Most providers insist that you sign a personal guarantee when you take out an advance. This means they could come after your personal and business assets for repayment. While they don’t typically report your payment history to credit bureaus, many MCA providers do report a default. A default would make it harder to obtain financing in the future.

The Bottom Line on Merchant Cash Advances

Like any loan product, a merchant cash advance can have a positive or negative impact on your business. It’s up to you to weigh its pros and cons against your business’ needs and its intended use, then decide if it’s your best option. If you still have questions reach out to the experts at Shield Funding today and we’d be happy to guide you through the application process.