March 1st 2023.
What is a Merchant Cash Advance?
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A Merchant Cash Advance is a type of business financing product in which a small business receives an advance of funds that must be repaid, plus interest, with a portion of their future credit card sales. Merchant cash advances are sometimes referred to as a "Business Cash Advance," "Credit Card Factoring," or "Credit Card Processing Loan," and are commonly abbreviated as MCA.
MCAs often have lower credit approval requirements than other business financing options. Merchant cash advance companies frequently work with borrowers who have bad credit scores and businesses that have been established for only a short time.
Small businesses also benefit from quick funding with a business cash advance, as most MCA companies are able to send the advance within 1-3 business days after approval.
The main condition of approval for an MCA is having the card sales to support repayment. A merchant cash advance typically offers the following:
Advance amounts: $5 - $1 million.
Factor rates: Starting at 1%-6% p/mo.
Term: 3-24 months
Speed: 1-2 Business days.
How do Merchant Cash Advances work?
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Receiving a business cash advance involves working with a financial institution called a merchant cash advance company. The MCA provider issues the advance, establishes your rates and fees, and collects payment from when you batch out your card sales.
Your credit rating can have an impact on the costs of a business cash advance, as those with lower credit scores may have higher rates and fees, as well as shorter repayment terms.
Let's look at the components of a merchant cash advance.
Advance Amount
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The amount of money you receive is based on your average monthly credit card transactions. Your credit and debit card sales are the primary factors that determine approval.
This is why it is referred to as an advance - the amount you receive is an advance of projected future card sales. Most MCA companies will base the amount on a monthly average of sales, but some might use weekly or quarterly sales.
Factor Rate
MCA companies use a factor rate instead of an interest rate. Factor rates can be the equivalent of anywhere from 40%-150% APR.
The factor rate is a fixed interest you pay back. Factor rates range from 1.09-1.50. Multiply the factor rate by the advance amount to determine your interest.
For example, if you borrowed $100,000 at a factor rate of 1.2, the formula would be:
$100,000 x 1.2 = $120,000.
You'd pay $20k in interest for borrowing $100k.
Holdback Rate
The holdback rate is the percentage of your future sales that get withheld and sent to the MCA company for repayment. Holdback rates are typically between 8%-15%.
Most MCAs have daily payments, but some companies offer weekly repayment. Because repayment is tied to your sales, the amount you pay fluctuates with your sales.
Terms
MCAs are short-term financing, which is typically repaid within 18 months. Some short-term financing goes to 24 months.
What are the best Merchant Cash Advance Companies?
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MCAs are an expensive way to borrow money, so it's important to work with a reputable merchant advance company in order to minimize your costs. Unfortunately, some MCA providers use predatory lending practices that could be costly for your company.
Here is our list of the top merchant advance companies.
Forward Financing
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Forward Financing LLC is a fintech company that helps small businesses obtain working capital. Its MCA offers amounts between $5-$300k with terms between 3-12 months.
Borrowers can get approved and funded within 24-48 hours. You'll need a credit score of 500, one year in business, and monthly revenue of $10,000 to qualify.
Credibly
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Credibly is an online lender that offers a suite of business financing products, including business cash advances. Its MCA amounts range between $5k-$400k.
The lender's factor rates fall anywhere from 1.09 to 1.41. The company also charges a 2.5% origination fee and a $50/month administration fee.
Small business owners need a credit score of 500, at least six months in business, and $15k in monthly revenue to qualify. Credibly can approve applications in as little as 4 hours and wire the advance within 24-48 hours.
Rapid Finance
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Rapid Finance is an online lender specializing in lightning-fast funding. The company offers MCA with amounts between $5k-$500k.
Rapid Finance MCA factor rates start at 1.22. You need a credit score of 550, three months in business, and $5k in monthly revenue to qualify.
The company offers a quick and easy application with minimal documentation. If approved, you can get your funds in as little as 24 hours.
CAN Capital
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Launched in 1998, CAN Capital is one of the originators of MCAs. Small business owners can get an advance between $2,500-$250k.
Instead of an origination fee, CAN Capital charges a $595 administrative fee for its MCA product. The company offers a simple online application.
CAN Capital does not set a minimum personal credit score for MCAs. You will need six months in business and $150k in annual revenue.
Reliant Funding
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Reliant Funding is a San Diego-based alternative lender whose main financing product is a business cash advance. Advance amounts range from $5k-$400k.
Sometimes, it's possible to get same-day funding, but it usually takes 1-3 business days. Reliant Funding's factor rates are between 1.10-1.40.
Its MCA product also includes an origination fee, but the company doesn't disclose the fee range. You'll need six months in business, $60k annual revenue, and a minimum credit score of 525 to qualify.
Platform-Specific MCAs
Some payment processors and eCommerce platforms offer business financing products to merchants who use their services. You may benefit from unique perks and discounts if you process payments using any of the following.
PayPal Working Capital is a financing product that operates like a merchant cash advance. Consider this product if your business processes
Applying for a merchant cash advance is about as simple as it gets for business finance. The application process is straightforward and typically requires minimal documentation.
Start by collecting your business documents, such as bank statements, tax returns, and business license.
Next, compare merchant advance companies to find the best rates and terms for your business. Once you’ve chosen your MCA provider, you can fill out an online application and submit your documents.
Most lenders have an online portal where you can check the status of your application and review any additional documents they need.
If approved, you can usually get funding within 1-3 business days.
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