A Merchant Cash Advance (MCA) isn’t technically a loan, but is one of the most popular methods used by small business owners who deal with credit cards—like restaurants and other retail merchants. Although they are often referred to as MCA loans, they’re technically an advance based upon a business’ monthly volume of credit card transactions. A regular and predictable flow of credit card transactions will often help a small business find the funds they need when traditional small business financing is unavailable.
Unlike an SBA loan or other traditional source of financing, an MCA company is more interested in your credit card transactions than your credit score. As mentioned above, every lender is a little different, but there are lenders willing to work with small businesses with only a year in business—provided they have $2,500 in monthly credit card transactions.
A merchant cash advance is more expensive than a traditional term loan, but there are MCA loans that cost less than financing your business with a credit card. Because of the cost of capital, you should look at an MCA loan as a short-term financing tool to either take advantage of an unusual business opportunity or a short-term bump in the road. And, depending on your margins, this type of financing just might not be a good fit for your business as interest rates can vary from a little higher than a term loan to much higher.
The good news is, an MCA lender will usually fund your advance in a matter of hours or days compared to weeks or months for a traditional loan at the bank. Many small business owners find the quick access to funds a very worthwhile tradeoff. And, unlike using your personal credit cards for business purposes, an MCA is tracked on your business credit, not your personal credit.
What’s more, some of the businesses that typically struggle to secure a business loan at the bank, are a good match for an MCA:
- Service business
- Small retail businesses
This is a segment of the small business financing market that has grown a lot in the last few years, so it’s important to pick a good MCA lender to work with. Here are some suggestions to help you pick the right one:
- Make sure you understand all the fees and terms upfront: Don’t assume they are all the same, you’ll want to make sure you know each and every fee you’re going to pay. You don’t want any surprises. If you’re working with someone who is unwilling or can’t speak specifically to what your fees will be, find another company to work with. Don’t settle for a bad deal. There are reputable MCA lenders who will gladly explain all their fees and terms to you.
- Make sure you have an estimate of the annual percentage rate (APR): This is one way you can compare costs in an apples to apples fashion. Because every MCA company is different, it can make it problematic to make comparisons.
- Don’t feel like you have to use the first MCA lender willing to work with you: Make sure you take the time to shop two or three before you decide who to work with. When I was looking for my first used car as a teenager, this advice from my Dad really frustrated me, but it helped me find the best used car. It also applies to searching for the right MCA loan.
A colleague and I were just discussing who should access funds via an MCA and who shouldn’t. Before he left my office he suggested that anyone looking at short-term financing like an MCA should sit down and map out a strategy for exactly how they intend to use the funds and what business benefit they expect to achieve with those funds before they start shopping for a merchant cash advance. This is great advice and shouldn’t be ignored.
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