A Merchant Cash Advance, or MCA, isn’t ideal for every situation, but it can work great for businesses that need quick access to funds they can use to cover payroll, purchase inventory or address other immediate expenses.
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What is a Merchant Cash Advance, or MCA?
A merchant cash advance (MCA), or business cash advance, is a form of alternative financing in which a lump sum of money is given to a business in exchange for a percentage of future sales.
Unlike a traditional small-business term loan, a merchant cash advance is typically a lesser amount of money, with smaller payments, repaid in a shorter period of time. For example, many MCAs are between $5,000 and $100,000 and repaid over 3 to 12 months.
Also, instead of a bank loan simple interest rate, the cost of a merchant cash advance is stated using a factor rate, and the repayment amount is typically a percentage of the business’s sales.
How Does a Merchant Cash Advance Work?
While merchant cash advances can range from $5K to $500K or more, the amount (the advance) you can borrow depends on your monthly business sales. Most cash advance providers will look at either your prior three months or six months average monthly collected revenue.
The repayment of the advance is structured in one of two ways. In the first repayment method, the merchant cash advance company collects a percentage of your daily credit and debit card receipts. This is the most common method.
In both cases, ACH payments are withdrawn directly from your business bank account. More on the two methods of repayment is detailed below.
Calculating the Cost of a Merchant Cash Advance
To overall cost of a merchant cash advance is based on the ability of your business to repay. The MCA provider determines a factor rate — typically ranging from 1.2 to 1.6 — based on that risk assessment.
The higher the factor rate, the higher the fees you pay. To see your total repayment amount you multiply the cash advance by the factor rate.
In the table below, you can see some examples using an an advance of $50,000 and different factor rates from 1.2 to 1.5. With a factor rate of 1.2, for example, the total repayment is $60,000 ($50,000 advance x 1.2), which includes fees of $10,000.
Table 1 - Examples of Cash Advances and Factor Rates
Total Cash Advance
Total Amount Repaid