What is a Merchant Cash Advance Loan?

David Rubin, the CEO of Capital Stack, is an important partner of ours in helping business owners with any credit get business loans. He wrote a great article on his site about the merchant cash advance industry, and gave us permission to post it here.


The merchant cash advance industry provides working capital to small and mid-sized businesses in need of financing for reasons such as the purchase of new equipment or inventory, expansion or remodeling, payoff of debt or taxes, or emergency funding. The merchant advance industry has been rapidly growing in recent years as the credit crisis has lead to businesses not being able to tap conventional sources such as banks and commercial finance firms.


What is a Merchant Cash Advance

The nature of the merchant cash advance product requires business owners to have a positive need for this alternative financing product. While a merchant cash advance is not a loan product, the SBA (Small Business Administration) does cater to a similar audience as the MCA (Merchant Cash Advance) industry. A traditional advance product underwrites the average visa/master card volume over a four month basis. Unless a cyclical business the same monthly average will apply the twelve most recent months of processing. The guts of this product are the factoring of future credit card receivables. Typically there are no personal guarantees, or collateral. Because this is not a loan, there are no terms associated with the purchase agreement. The business effectively agrees to sell a portion of their future credit card swipes today for a discount. The agreements are usually structured in assumptions of repayment, usually estimated in a six to nine month repayment cycle. Payoff is very simple. The merchant agrees to a small withhold of their future credit card swipes. This process takes place until the principal is paid down.


Business Loans are getting more challenging and so the emergence of the Merchant Cash Advance industry is booming. Business cash advances are accompanied by fast approval and even faster cash in merchant’s bank account. Underwriting is very simple. The advance doesn’t show up on personal credit of the owner. Businesses continue to show the need for the Merchant Cash Advance product. “Business Week” reports that the size of the merchant cash advance industry jumped 50% in 2007, to around $700 million.


Merchants want to know how it works and what it will mean for them. The business owner must use the providers’ credit card processor because the advance is paid back automatically as a percentage of each batch’s proceeds. Business cash advances are unquestionably more costly than traditional bank loan financing; it is simply an alternative to strenuous applications to banks looking for all sorts of collateral on the business and personally on the owner. This is a rapid financing option that utilizes future sales, hence no collateral on the advance. Cash providers contend that they can continue to collect from credit card receipts even after a business has filed for bankruptcy (when the automatic stay protects the business from most loan collection efforts). Credit card funding is becoming one of the fastest growing financing niches in the US. Cash advances are not just for little merchants programs are available up to $5 million dollars.


This program recently started providing an alternative to a split on the credit card receivables. Its underwritten on the bank cash flow. Repayment as well out of the bank account, with a fixed debit daily on business banking days.
The program also funds nontraditional SIC codes of different business types like attorneys, accountants and other business that don’t conventionally process credit cards.


The starter market has evolved rapidly over the course of the last three years. It essentially covers all of the fall out of the conventional credit card advance program. This programs is geared to business’s that can’t qualify for a traditional advance. Less than one year in business is, open liens, bankruptcies, foreclosure, judgments and high risk industry are funded in the program.


As long as there are business’s in need of fast money, reliable and unsecured capital, the cash advance industry will continue to grow and evolve. The cash advance industry is only about 10 years old, and has about 400,000 businesses funded nationally.

It takes a little cash to change the world.

So what are you waiting for?

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  1. To say that business cash advances are “unquestionably more costly than traditional bank financing” is like saying that the Titanic is unquestionably larger than the Minnow (Gilligan’s Island). If the repayment rate for a cash advance carries a factor of 1.29, which is a very common “rate” in today’s market, an advance of $10,000 that is to be repaid over a 6 month term would cost the borrrower $2,900.00 and would be unpaid until such time as the lender had received $12,900.00 from credit card receivables or ach’s.

    Unless my math is wrong this factor of 1.29 over 6 months equates to an APR of 58%. That is not just “unquestionably more costly than traditional bank financing” you’ve now entered into the pay day loan area of costs for borrowed money.

  2. Here is where the math doesn’t add up.

    Under any factoring type product you cant apply an APR. Reason being, in the example above its actually an estimated repayment of 6 months. What happens if the business slumps in sales and it turns into a 9, 12, 16 month transaction. What would the effective rate be? Since there is no fixed term on the product, you can only apply the cost of the factor once the transaction is completed. This way the repayment works with the performance of the business.

    It is important to note that this capital is available to business’s of many profiles,

    – personal credit score down to 500
    – in business’s for 3 months
    – industries that are considered high risk
    – minimal profitability
    – certain open lien’s and judgments

    Flexibility and speed in delivering as little as $2k & up to $500k of unsecured funding. There is a risk adjustment to the product do to the nature of the risk.

    Overall the program is helping many merchants that have been turned down by conventional means.


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