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History of the Merchant Cash Advance (MCA) Industry

Apr 19, 2022 • 6 min read
Merchant Cash Advance MCA
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      For businesses looking for a non-traditional lending option, a merchant cash advance may be the right opportunity. An MCA is not a loan; rather, it is a promise of future revenue that a business will pay back to the lender under agreed-upon terms. MCAs are available to various businesses looking for an influx of cash without pursuing a traditional small business loan.

      What is a merchant cash advance (MCA)?

      Non-loan cash advances, like an MCA, are usually quick to close and, in most cases, don’t require a down payment. Businesses can get $5,000 to $200,000 within 24 hours depending on the funding provider. The flexibility of MCAs provides an easy-to-obtain cash advance for any business.

      MCAs are different from traditional loans in quite a few ways, including: 

      • An MCA is not considered a loan, so it is not subject to the same regulations as a conventional loan.
      • Repayment is based on revenue, and there are no set payments.

      How did the MCA industry start?

      It’s no surprise that small businesses are looking for unique ways to get capital to fund the growth and operation of companies. In the late 1990s, the same was true for business owner Barbara Johnson. According to Revenued, Barbara ran a group of successful playgroup franchises and needed an influx of cash to spearhead a summer marketing campaign. She had the idea of borrowing funds from future credit card transactions, and thus, the merchant cash advance industry was born. Barbara and her husband founded AdvanceMe and patented the ability to separate credit card transactions. This innovation spearheaded the MCA industry. 

      MCA industry grows with new payment options.

      Throughout the last 25 years, merchant cash advances have grown in popularity and become a trusted source of funding for small businesses. Merchant cash advances began to take off in the early 2000s and have grown exponentially. 

      Originally, MCAs were advantageous for companies that accepted debit and credit cards, which grew with more businesses adding point-of-sale systems and different payment types. As the industry has continued to grow, MCAs have started to be more available for companies that collect revenue through ACH transactions and other forms of payment.

      How the 2008 recession changed the MCA industry.

      The 2008 recession changed industries across the world, including merchant cash advances. As businesses struggled and traditional banks were wary of lending money, MCAs found an opportunity to provide short-term funding to small businesses. The Great Recession also prompted banks to create stricter lending criteria, making getting a traditional small business loan more difficult. Merchant cash advances grew during the recession and have continued to grow because of recession-based changes to lending.   

      Merchant cash advances continued to grow in the 2010s after larger lending institutions began offering MCAs and other non-traditional lending opportunities. Large banks like Wells Fargo and TAB helped spearhead what has turned into a billion-dollar industry.

      Current MCA industry.

      For small businesses today, merchant cash advances provide an opportunity to get cash when a traditional loan isn’t available. If you’re looking for a merchant cash advance with same-day funding, or you need money to help maintain your business, knowing the benefits and the drawbacks of an MCA is essential. 

      Pros of MCA.

      When looking for funding, merchant cash advance brokers may benefit your search. MCA brokers work with lenders, and those seeking MCA funding, to help streamline the process of finding each other and defining the terms of the financing. You can also skip the MCA brokers and work directly with a lending institution online. As the MCA industry has grown, there are many more providers, and the availability for funding is more extensive. 

      Cons of MCA.

      If you’re considering a cash advance for your business, you should understand how an MCA works and how much money you will be paying back. For instance, let’s say you’re a local restaurant looking for $20,000 from an MCA to purchase new equipment. You find an MCA lender that you like. This lender charges a factor rate of 1.5. The factor rate is similar to the interest rate of a traditional loan and determines how much you’ll be repaying. To figure out the total cost of the loan, multiply the loan amount by the factor rate. 

      In this case: $20,000 x 1.5 = $30,000

      The restaurant owner will pay $10,000 for the merchant cash advance. The restaurant owner will pay back the loan, plus the additional cost. The terms of the funding are decided with the lender and repayment will include factors such as a percentage of daily revenue or a fixed payment. 

      Merchant cash advances are beneficial for small businesses looking for same-day funding to help with inventory needs or other expenses. Many different lending options are available for small businesses. A merchant cash advance is a non-traditional way for small businesses to gain the funding they need. There are also other opportunities, such as a line of credit or a traditional loan. It’s important to find the proper funding for your business and your current needs. 

      Frequently asked questions.

      Are MCAs a scam?

      While MCAs are still reasonably new, many trusted lenders participate in MCA programs. They are a non-traditional lending source, but they are not a scam. They provide critical funding to small businesses when a traditional loan or line of credit may not meet the business’ needs. 

      Merchant cash advance vs. line of credit, which one is better?

      A line of credit can offer capital when needed, up to a certain amount. However, like a traditional loan, a business line of credit still has any traditional lending source’s regulations and necessary steps. The initial approval for a line of credit can take time and involve many factors that not all businesses can meet. 

      Merchant cash advance vs. bank loan, which one is better?

      A traditional bank loan is more regulated and time-consuming to procure. Merchant cash advances are beneficial for businesses that need same-day funding or cannot meet the requirements of a traditional bank loan. 

      Author bio

      Andrew Strom Adams advises startups and small businesses, helping them run more efficiently, increase revenue, and hire the right people. He holds an MBA from Westminster College in Salt Lake City. 



      The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

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      About the author
      Andrew Adams

      Andrew Strom Adams writes about business, marketing, technology, and finance for small businesses. He holds an MBA from Westminster College in Salt Lake City and a bachelor's degree in Journalism from Oklahoma Baptist University. He's helped law firms, startups, and other companies communicate more effectively. Andrew takes complex topics and distills them to help educate a company's target customers. He's based in Salt Lake City and enjoys hanging out with his two kids, enjoying the outdoors, and watching reality tv.

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