What Is A Merchant Cash Advance And Is It Right For Your Business?

Note: Merchant cash advances are known for their simplified approval process, fast decisions, and quick funding, but they also come with higher repayment rates. As with any financing option, know your options upfront, and talk with your Lendio finance manager to ensure you’re selecting the best option for your business’s needs and situation.

What Is A Merchant Cash Advance?

A merchant cash advance is a form of business financing that provides an advance on a business’s future credit card sales. Cash advances are repaid automatically through a percentage of the business’s daily credit card deposits.

Historically, merchant cash advances have been used by newer and smaller small businesses that may have a more difficult time qualifying due to a short time in business or low credit score. Since merchant cash advances are flexible and carry no restrictions on how they can be used by the borrower and tend to fund quickly, they’ve also been used by businesses facing unexpected, cash-crunch emergencies.

Functionally, a merchant cash advance is similar to personal cash advances, except the small business borrower receives an advance on future credit card sales rather than anticipated, personal income. Note that a merchant cash advance is not the same as a business cash advance which is repaid as an automated, fixed daily or weekly withdrawal based on cash flow.

Merchant Cash Advance Approval Requirements

Nearly every aspect of applying for a merchant cash advance is meant to be as easy and accessible as possible, but the funding comes with a tradeoff: interest rates and fees for a merchant cash advance can be substantially higher than with other financing options.

Rather than the mountains of documents needed for traditional term loans, merchant cash advances have a fairly streamlined application process. In most cases, businesses submit 4–6 months of bank statements along with other basic documentation. Daily credit card revenue, which is also used to pay back the advance, is a key qualifier for a cash advance.

Merchant cash advances are repaid via automatic deductions associated with daily credit card sales. When applying, a business should expect to show its ability to make consistent credit card sales, typically in the form of several months of credit card receipts. Collateral is not required.

What Terms Can You Get With A Merchant Cash Advance?

Merchant cash advances usually range between $5,000 and $200,000, although the amount can vary based on the lender. Payback is calculated based on a factor rate rather than an interest rate. Multiplying the advance by the factor rate gives the total amount to be paid back.

For example, a $20,000 merchant cash advance with a factor rate of 1.5 would result in a total repayment of $30,000.

$20,000 cash advance 

x 1.5 factor rate

$30,000 total repayment

Note that merchant cash advances are repaid over a short period of time (e.g., 6 months), which can make repayment seem higher.

How Does A Merchant Cash Advance Work?

With merchant cash advances, businesses leverage their future credit card receivables to access funds now. Once a business has received the advance from the financier, repayment begins. Each day, the lender will withhold the agreed-upon percentage of the business’s credit card deposits. This results in a fluctuating amount paid back each day.

There are 2 ways the repayment of a merchant cash advance is processed:

1. Split Withholding Repayment: This method is most popular and permits a financier to take their agreed-upon percentage directly out of a business’s credit card revenue each day.
2. Lock-box Repayment: The business’s daily deposits go straight to an account overseen by the lender, and each day, the business receives its share of the previous day’s deposits.

Pros And Cons Of A Merchant Cash Advance

Before taking a cash advance or any funding option, compare it with the other funding options available. Merchant cash advances are a unique form of financing with benefits and drawbacks: 

Merchant Cash Advance Pros

• Speed of Funding: Cash advances are quick to fund and can often provide cash within 24 hours of approval..
• Not Collateralized: Generally, no collateral is required for a merchant cash advance. 
• Long Business History Not Required: Cash advances are often pitched to newer businesses or businesses with a shorter financial history, although you may be asked to provide 4-6 months of bank statements, receivables, or daily sales records.
• Won’t Appear on a Credit Report: Due to the unique structure of a merchant cash advance payment, it’s actually considered a sales transaction. This designation means it won’t appear on a credit report.

Merchant Cash Advance Cons

• Expensive: Merchant cash advances are infamous for their high-interest rates. A high rate or longer repayment period due to low sales can result in an overall higher cost of financing. 
• Not Federally Regulated: Since merchant cash advances are considered commercial transactions, they lack some of the regulations and requirements associated with other borrowing options.
• Business Credit May Still Be Checked: Some financiers may check credit prior to approving the advance, which can impact the factor rate of the advance.
• Doesn’t Improve Your Credit: As mentioned above, due to the unique structure of a merchant cash advance payment, it’s considered a sales transaction and usually doesn’t appear on a credit report. But this means repayment of a merchant cash advance also won’t help build credit history or improve a credit score.

Similar Financing Options: Business Cash Advance, Credit Card, And Term Loans

Lendio recommends all business borrowers know and understand available financing options before deciding which to accept—including merchant cash advances. To help, Lendio ensures each approved applicant is teamed with a financing expert who can explain the offers, the terms, answer all questions, and facilitate the financing process. 

Merchant Cash Advance VS Business Cash Advance

Small business owners may also consider a business cash advance, which is similar to a merchant cash advance but is based on the business’s cash flow rather than on credit card receipts. Repayment for a business cash advance is made through an automated “fixed daily percentage” withdrawal (ACH) from the business’s bank account and terms may be structured with daily or weekly remittance. Additionally, the borrower knows up front exactly how much each withdrawal will be.

Merchant Cash Advance VS Credit Cards VS Business Term Loans

Here is how a merchant cash advance generally compares to business credit cards and small business term loans. Note that these qualities can change based on the specifics of the specific financing type and the applicant’s creditworthiness.

When choosing a financing option, due diligence is essential. Also know that funding timelines vary from lender to lender. While many lenders deliver the cash advance to the borrower’s account within 24 hours, a larger merchant cash advance from some lenders could take more than a week to arrive.

Should You Apply For A Merchant Cash Advance?

While the quick capital a merchant cash advance provides can be appealing, before proceeding, ensure that you’ve considered other options. Merchant cash advances include daily repayments and frequently have higher repayment terms than other types of business financing. You can find out all of the financing options available to you by completing Lendio’s short, online financing and loan application. Once approved, you’ll be paired with a financing manager who can help you sort through the offered financing options to determine the best one for your situation.