What Is A MCA Loan? (Is A Merchant Cash Advance Right For Your Business?)

An MCA loan stands for a Merchant Cash Advance loan. This is not a business loan but is considered a cash advance based on the number of an individual’s credit card receipts.

The funding provider of the loan gets paid back through a process that involves taking a segment of your future credit card sales every day.

In general, you can get approved for an MCA loan in just a day or two and without much paperwork. However, there tends to be a catch as you will probably pay for this added convenience in literal terms with higher interest rates.

Happy and successful businessman holding US dollar money bills in hand. Hand showing and counting cash on desk in concept of investment, success, freedom, financial prospects, career advancement.

Due to this loan option being somewhat more expensive than any others, it is usually recommended to take advantage of an MCA loan for short-term opportunities when you’re in need of fast cash.

If you require money to help in certain financial bind situations, then an MCA loan can become very expensive. Doing this will see you rely on merchant cash advances because the higher cost can make it more difficult to manage and control your future cash flow. 

Continue reading to find out more about MCA loans and how they work.

MCA Loan Explained

Merchant Cash Advances (MCA loans) provide smaller-run businesses with an alternative to other forms of financing such as traditional bank loans.

With an MCA loan, business owners will receive funds in the form of a lump sum upfront. This comes from a merchant cash advance provider. The advance is then repaid with a percentage of the small business sales.

MCA loans can be options for businesses that have acquired large credit card sales volumes, require funding as quickly as possible, or if they do not qualify for a traditional loan in a bank. 

So, an MCA provider will give you an upfront cash fee in exchange for portions of your future credit card sales. 

How MCA Loans Work

Historically, merchant cash advances have been for businesses whose revenue stems from credit or debit card sales. Examples of such businesses include cafes, restaurants, and retail stores.

However, MCA loans are also available to other businesses that don’t rely as heavily on credit and debit card sales.

Merchant cash advance repayments can be structured in two different ways. One involves receiving an upfront sum of money in exchange for a portion of your business’s future credit and debit card sales.

The second is to receive an upfront sum of cash that will then be repaid by remitting fixed daily or weekly debits from your bank account. This is known as ACH (Automated Clearing House) withdrawals. 

The second option has become arguably the most common type of MCA loan. These are referred to as ACH merchant cash advances that allow providers to market to certain businesses that are not essentially tied to credit and debit card sales. 

Rather than making a single fixed payment every month from your bank account over a repayment period set out in advance, you will make daily or weekly payments (plus fees) until the advance has been fully paid. 

The amount you will pay in fees depends on your ability to repay the merchant cash advance.

The MCA provider will set forth a factor rate that typically ranges from 1.2 to 1.5. This is based on a risk assessment. You will have to pay higher fees if the factor rate is higher and vice versa. 

To get your total repayment amount, you will have to multiply the cash advance by the factor rate distributed by the MCA provider. For instance, if an advance of $50,000 has a factor rate of 1.4, you will have a total repayment of $70,000. This includes the additional fees of $20,000. 

MCA Loans Pro And Cons 

You must consider the advantages or disadvantages of MCA loans before considering if they are the right course of action for you.

Here are the key advantages to taking out an MCA loan:

  • Flexible terms of repayment
  • You get fast access to cash
  • You can choose how to use it
  • No strong credit score is required
  • The loan does not require any kind of collateral

The principal benefit of merchant cash advances is the easy and fast access to cash. If you need the cash quickly, many issuers can get it for you within 48 to 72 hours. On top of this, they don’t usually require personal or business credit. Instead, they put more emphasis on credit card and non-invoice sales numbers. 

Moreover, issuers tend to have very little to no stipulations on how you spend your cash. This means you have more freedom to use your advance on what you really need without being guided by anyone else. Also, you won’t need to put up any collateral apart from your future credit card receipts. 

Some of the main disadvantages of MCA loans include:

  • They tend to be very expensive with 70% to 200% APR
  • They do not help you build business credit
  • There is a daily minimum payment that can negatively affect your cash flow
  • Can lock-in merchant processor
  • Your business must accept credit cards

MCA loans can be significantly expensive. If you are left with a high factor rate, you could see yourself paying up to 200% APR. Even low factor rates can be around 35%.

Furthermore, as you are not on a loan and do not report your payment history to the business credit bureaus, your business credit will not be improved. Therefore, it’s an unproductive way of financing for startup businesses. 

Is It Right For Your Business? 

A merchant cash advance can be a useful tool for accessing capital quickly. However, it can also put your business’s cash flow in jeopardy.

The best use for an MCA loan is to fund short-term opportunities when you want to generate more ROI (Return On Investment) on projects (i.e. purchasing of quick-turnaround items and inventory).

Businesses that will be most successful with an MCA are those that borrow to augment some type of ROI generating activity. Businesses that are mindful of their outgoings and understand these costs concerning their ROI gain are better suited to an MCA. If this sounds like you, an MCA loan may be a good option. 

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