Business Financing 101: What Are Merchant Cash Advances?

Small business financing is a web of purposes, products, and methods of lowering cost by structuring the credit around various assets possessed by borrowers. As a result, learning its landscape can be a challenge. If your business relies heavily on credit card transactions, then you should know about merchant cash advances as an option. They are based on the income you get through your merchant account, so they appeal to retail and entertainment businesses as well as other cash and carry operations.

How the Merchant Cash Advance Works

When you apply for an MCA, the lender evaluates your company’s total income as well as the income from the merchant account. They also check out your credit history and overhead costs to make sure any offered advance is likely to be repayed within the lender’s estimated window. Finally, they calculate the costs for financing based on the risk presented by your information and the advance size.

All of this usually takes only three to five business days, and it can go faster when you work with the same lender repeatedly because they learn about your business’s stability directly, making it easier to say yes. After you get the money, repayment is calculated as a percentage of the merchant account’s income each month, so it flexes with your volume of business. If you have a huge month, you might even pay it off all at once.

Use Cases for Merchant Cash Advances

Borrowers looking for a merchant cash advance typically need money quickly, since there is usually seven business days or less from application to cash in the account if you are approved. They also tend to be companies with predictable demand cycles who can rely on a known quantity like a holiday or seasonal demand to provide the income needed to pay off the advance quickly.

Most of the time, MCAs are used as bridge products because they can provide thousands in working capital just before an opportunity for profit. This allows you to go from a lean, low-capital operation when demand is down to a fully loaded, inventory-rich and well-staffed facility that is ready to face it’s annual busy period without having to risk your reserve cash. They can finance inventory, personnel, redecoration, or even much needed repair and maintenance. The best part is that once the advance is paid off, you can apply for another so it works as a cash flow management tool too!