What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a non-traditional form of business financing where you receive a lump-sum payment upfront in exchange for a portion of your future credit or debit card sales. It's like securing the advance with your future revenue. MCAs are commonly used by businesses that generate income through credit card transactions.
However, an MCA isn’t considered a traditional business loan, and your repayment history isn’t reported to credit bureaus, so it won’t help you build credit. The eligibility criteria for MCAs are generally lenient, making them accessible to businesses with poor credit.
How Does a Merchant Cash Advance Work?
A merchant cash advance (MCA) provides funds to your business based on anticipated future credit or debit card sales. It's commonly used to boost working capital and address cash flow issues. Here’s how it works:
1. Receiving Funds
Your business gets the advance amount agreed upon with the financing company, which is deposited directly into your business bank account.
2. Fees and Costs
Instead of interest, MCAs use a factor rate applied to the total amount of the advance. For instance, a $100,000 advance with a factor rate of 1.4 would require a total repayment of $140,000.
3. Repayment
Repayments are made based on your future sales and are usually deducted daily, though some MCAs may offer weekly payments. The advance is fully repaid when you have paid back the borrowed amount along with the factor rate and any additional fees.
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