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What is a Merchant Cash Advance?

April 2, 2020

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A merchant cash advance isn’t a loan.

A merchant cash advance is a lump sum payment that is based around the percentage of future receivables. It’s an advance on your credit card or debit card sales. If a business needs cash quickly, an MCA is a great option for cash-strapped businesses looking to cash in on a hot-iron opportunity.

The advance is repaid by the merchant through credit card sales – which can range anywhere from 10%-20% of daily sales – until the advance is completely paid back to the lender/funding company.

If a short-term problem needs solving and the future sales projections of a business look more than promising, the upfront capital of a merchant cash advance can help propel a fledgling business into the stratosphere.

MCA Terms

Merchant cash advances may look like small business loans, but the way they are repaid and how the interest is calculated differ. MCA lenders will usually look at credit card receipts and sales to determine whether a company has the means to pay back the advance.

The MCA “holdback” refers to the percentage of credit card sales that is repaid to the MCA lender every day. As said above, this amount can range anywhere from 10%-20%, give or take a few percentage points. This amount is usually set in stone until the MCA can be repaid.

The higher the number of credit card sales, the faster the advance can be repaid. Essentially, the repayment of this advance is relative to the daily gross of credit card receipts.

The interest rate of an MCA differs from the holdback amount, and most MCA lenders charge a “factor” rate. This factor rate can range from double to triple digits depending on the lender, which incentivizes small businesses to only use these types of advances when they know they can repay them. Since an MCA is not like a traditional term loan, it is not regulated as such; this means that the interest rate typically isn’t reduced over the course of the merchant cash advance.

MCAs are usually repaid very quickly, with the average MCA paid off in 3-12 months. If an MCA is used correctly, it is essentially a discount on future money.

When Should a Business Use a Merchant Cash Advance?

In short, a merchant cash advance is great for businesses who want to take advantage of a short-term opportunity, yet lack the capital to properly prepare. It could be inventory for an upcoming sale, the purchase of new equipment for a large-scale job, or the hire of new employees for a generous contract. For example:

George owns a fireworks shop. It’s a slow season, but June has just reared its head and the 4th of July sales are going to start rolling in fast. George doesn’t have enough inventory to properly stock up for the coming sale. However, he doesn’t have the money to buy new inventory.

But he knows he can repay if he gets a loan because he always does extremely well during June. Despite this, banks and other financial institutions won’t issue him a loan due to his credit and his sales during the slow months.

George decides to go to a merchant cash advance company. They make a deal and wire him $10,000 for new inventory. George uses this new capital to buy inventory for the sale and ends up making a killing! He made more than enough money to completely repay the advance. This is the best case scenario for merchant cash advances, and it’s something that investors and MCA lenders look out for.

Since the interest rates are quite high on that $10,000, investors and funding companies stand to make a profit from George; nevertheless, George is quite happy because without that money, he would not have been able to buy a full stock of inventory which made him $45,000… without that sale, his business could have been in bad shape.

In this scenario, a merchant cash advance makes sense. Our fireworks shop owner tried every other means of lending and found that only an MCA company would approve him for the money. The reason why MCAs have received a bad rap in the past is because some merchants have taken out multiple MCAs to pay back old MCAs, which is a practice that we suggest highly against. This is why our online platform only works with approved funders who tend to lend to business owners who make good on their repayments.

Why Should Businesses Consider an MCA?

MCAs have an easy qualifying process and the factor rate is calculated in a way that won’t disrupt the overall average cash flow of the business. We all know that it takes money to make money, and sometimes an MCA is completely necessary for small businesses looking to grow.

To grow a business, you need to hire more employees and purchase more equipment/inventory to reach your goals and reach the higher profits that are associated with an overall increase in business.

Say a business owner wants to launch a new product line that is in high market demand. They borrow $100,000 at a payback rate of $130,000. This may seem naive until you consider the fact that the capital that they borrowed can ultimately fuel long-term business growth. Once the new product line is out, the company makes $450,000, with a healthy percentage in business growth and net profit as well. This means that the MCA funding company profits, the investors behind the funding companies profit, and the small business owner reaches a new level of business growth. MCAs can be a responsible part of healthy and immediate business growth. Take it from Entrepreneur Magazine: “even short-term capital should be part of a long-term plan”.

How to Qualify For An MCA

The requirements for a merchant cash advance are not as stringent as more-traditional lending options such as business lines of credit and bank loans. While merchant cash advances essentially act like loans, the payment structure is much different. Because there is not a huge amount of qualifying criteria, an MCA comes with high interest. Merchant cash advances are often used by businesses who lack a good credit score or financial history, or for companies that have not been in business too long.

Some of the biggest factors when qualifying for a merchant cash advance include the average of the last 3 months total deposits, a minimum of 3 months time in business, and a majority of ownership in a business. Some lenders may have a minimum requirement of 6 months in business; it really depends on the lender. Things such as overdrafts, credit scores, and number of deposits also can play a factor, but a bad credit score does not usually mean a denial of an advance.


We are not a MCA lender, nor are we an investing group. Rather, Supervest is an online platform that bridges the gap between accredited investors looking to invest in merchant cash advance funds and MCA funders that need additional capital to fuel small business growth.

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