A merchant cash advance (MCA) is an alternative to a standard small-business loan. An MCA company pays you a lump amount in exchange for a percentage of your business’s future sales.

The process involves getting an upfront cash payment in return for a proportion of future credit or debit card sales or receiving upfront cash that you reimburse the lender through set weekly or daily payments. The payback time is usually three to twelve months; the larger your credit card sales, the sooner you’ll be able to reimburse the merchant cash advance.

Advantages of Merchant Cash Advances

You can usually acquire a merchant cash advance in a week or less. The application is shorter than a conventional loan application, allowing lenders to complete transactions more quickly. There is no requirement for collateral; the MCA lenders will examine your company’s receipts to see if you will be able to repay. Since you won’t have to put up assets as collateral for your loan, you won’t have upfront resources at risk if you fail to pay back the advance.

They also don’t require excellent personal or business credit, relying instead on non-invoice sales data. Issuers also set few if any restrictions on how the funds are to be used, giving you more flexibility in how you spend the advance.

Another potential advantage of merchant cash advances is that repayments can change depending on how well your business is performing. This is true when you have arranged a repayment plan based on a fixed proportion of your revenue.

Disadvantages of Merchant Cash Advances

The interest rates can be very high on merchant cash advances, typically ranging from 40% even into triple-digit percentages. This is far more expensive than traditional bank loans, which normally have APRs of 10% or less.

Another possible con of an MCA is there is no benefit to paying off your debt early. With a small-business loan, early repayment could result in less interest. With a merchant cash advance, however, you’ll pay a specified sum, no matter how much of the debt you’ve paid off.

Merchant cash advances can trap an unwary business owner in a debt cycle because of their convenience. Due to the high fees and frequency of repayments of MCAs, which can generate cash-flow issues, business owners may find themselves in need of another advance quickly after taking out the first.

Merchant Cash Advances’ Best Uses

Because a merchant cash advance can be accessed quickly by a qualifying business owner, it might be a useful alternative for a business owner who needs immediate cash for some of the following situations:

  • Temporary cash flow assistance
  • Taking care of other pending debts
  • Unexpected costs
  • An opportunity to purchase business merchandise at a significant discount

A merchant cash advance can provide quick financing revenues to fill gaps in cash flow. It should be regarded as a short-term financing option that can be helpful when needed.

At POM Capital & Funding Services, we offer a variety of financing options for New York businesses. Call us at 631-354-9290 or write to us at [email protected] to learn more about how a merchant cash advance may work for you.

POM Capital & Funding Services is a leading provider of alternative funding solutions for businesses of all types and sizes, offering commercial finance solutions and products to businesses in the Centerport, New York area and throughout the state of New York.