Merchant cash advance credit card loan

5 Ways to Use a Merchant Cash Advance

3 min read • Nov 03, 2021 • Lendio

Merchant cash advances, or MCAs, are a popular lending product among small businesses, especially newer and smaller operations. Functionally, MCAs are similar to personal cash advances, except the small business borrower receives an advance on future credit card sales rather than anticipated, personal income. 

You can use a merchant cash advance in many ways. In some cases, a business might be dealing with an emergency, and an MCA can mean the difference between staying open and shutting the doors. In other cases, an MCA might help a business capitalize on a sudden opportunity for expansion. However, there are a few things to know before proceeding.

Is a Merchant Cash Advance a Loan?

A merchant cash advance is not technically a loan: it is an advance on future sales. In most situations, MCAs are borrowed against future daily credit card sales.

Because of this, MCAs often have a short turnaround time from application to approval—sometimes small businesses can receive funds in as few as 24 hours. This speed is part of the appeal of an MCA.

What Should You Expect When Applying for Merchant Cash Advance?

MCAs are repaid via automatic deductions associated with daily credit card sales. The application process is pretty simple and straightforward, but the applicant will be expected to show the small business’s ability to make consistent credit card sales in the form of months’ worth credit card receipts.

While an MCA may be offered in amounts ranging from $5,000 to $200,000, they do have higher interest rates starting as low as 18%. Remember, however, that collateral isn’t required for an MCA.

How Can You Use a Merchant Cash Advance?

Unlike an equipment loan or another use-specific financing product, a merchant cash advance can be used at the discretion of the business owner. Here are a few examples of when an MCA can come come in handy:

1. Avoid a Cash Crunch

A cash crunch—when cash outflow exceeds cash inflow—can be disastrous, like when an unexpected bill depletes the reserves to pay employee wages or rent. An MCA’s fast approval process can serve as a quick fix.

2. Shore Up Inventory

MCAs are popular with businesses in the beverage and restaurant space, as well as retailers, because they can be used to buy inventory, which is especially useful for businesses with busy/slow periods throughout the year.

3. Operate Seasonally

For businesses that operate only on a seasonal basis, applying for an MCA before the start of the busy season can ensure the availability of funds on-hand to run at full steam from day one.  

4. Handle Unexpected Crises

Beyond cash crunches, an MCA can help a business overcome costly problems, like an equipment failure. Once approved for an MCA, a small business can receive funds quickly and take on issues that might not have been affordable otherwise.

5. Seize New Opportunities

Finally, an MCA can help a small business leap into expansion opportunities that require funds beyond what’s currently on hand. Being able to take on opportunities as they appear can be a boon to business growth longer term—and the speed of a merchant cash advance can help facilitate them.

 

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

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