A Merchant Cash Advance (MCA) is sometimes referred to as a “Business Cash Advance,” “Credit Card Factoring,” or a “Credit Card Processing Loan.” A business owner will receive a lump sum paid back via a fixed percentage (Holdback Rate) of future sales. Payments are automatically deducted each day, and the size of each one fluctuates with your sales volume. A merchant cash advance is easier to qualify for than other small business loan options. Small business owners with little collateral, business credit history, or low fico credit scores may benefit from this option. The amount of business financing you qualify for from merchant cash advance companies depends on the amount of future receivables or the sales you’re projected to make over the upcoming repayment term. With this kind of business financing arrangement, you agree to receive a lump sum payment of capital in exchange for your future sales at a discount. This is known as an “advance” on your future sales/receivables. The capital is distributed almost immediately from the merchant cash advance provider instead of waiting weeks/months to get the full amount from your future sales.

How it works

For example, let’s say you borrow $50,000 with a factor rate of 1.4. This means you’d owe $70,000 in total. MCA providers deduct a 10% holdback rate of your daily gross sales via ACH. In the first month, you generate $100,000 in revenue. Based on your percentage, you’d pay approximately $455 per business day (In this case, 22 business days) to pay back $10,000 for the month. In the second month, your sales drop to $70,000. Since the holdback percentage never changes, your daily payment would drop to approximately $318. Like other short-term business financing products, a merchant cash advance is designed to be paid in full as soon as possible. However, the total cost of funds decreases when your outflows are more spread out due to slow sales.