Disclaimer: Information in the merchant cash advance articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the merchant cash advance articles often covers financial products that Biz2Credit does not currently offer.

Need cash for your business? Merchant cash advances offer a unique solution for businesses seeking fast access to capital without the hassles of traditional lending. However, they’re not the best short-term business funding solution for any business.

Here, we explore seven types of businesses that may leverage merchant cash advances to their advantage. From restaurants to startups, an MCA for small businesses may be right for your needs. Let’s dive in and discover how this innovative financing tool can propel your business forward.

In this article:

• What is a merchant cash advance and how does it work?
• 7 types of businesses that can use merchant cash advances
• Pros and cons of a merchant cash advance
• Alternative business financing options

What’s a Merchant Cash Advance and How Does It Work?

Merchant cash advances (MCAs) offer quick business financing. In a MCA, the lender releases a lump sum of cash to the business, in exchange for a percentage of future credit card or debit card sales. Merchant cash advances are not actually small business loans but commercial agreements where the borrower sells future credit card sales to the funding provider.

A small business makes payments until the agreed amount is paid in full, so the transaction term depends on the specific arrangement.

Typically, you’ll have to pay back a MCA within one year, but many merchant cash advance lenders are willing to offer more flexible terms. MCAs can include customized financing structures with no fixed repayment term, but payments are part of a monthly or daily sales holdback. Instead of charging financing costs through interest rates, MCA providers use factor rates, which determine the percentage of sales collected for repayment. The advance is repaid with daily, weekly, bi-monthly, or monthly payments.

Merchant cash advances are lower risk for lenders and suitable for businesses turned down when applying for other financing options due to bad credit or limited time in business. Since future sales secure the advance, there is no need to offer collateral or a personal guarantee.

7 types of businesses that can use merchant cash advances

Almost any type of small business could use a merchant cash advance as a source of capital, but MCAs are most frequently used by businesses that:

• Accept payments via credit cards or debit cards: MCAs are repaid through a predetermined repayment schedule, but typically depend on credit card financing.
• Do not have a good credit history: New businesses or small businesses with bad credit may be approved for a merchant cash advance without a hefty down payment or collateral.
• Need immediate cash: MCAs can provide funds the same day for some applicants.
• Have increasing sales: Growing businesses find merchant loans to work well when their sales are on an upward trend. The funding can be paid off quickly as credit card revenue increases.

While the list of exact businesses that can use MCAs is unlimited, the following list gives examples of some businesses that may benefit the most from a cash advance financing arrangement.

Restaurants

All types of restaurants make great candidates for merchant cash advances, including dine-in restaurants, food trucks, franchised fast-food restaurants, cafes, pizza delivery shops, and more. The two primary reasons MCAs work well for those in the food and beverage world are that a large percentage of a restaurant’s annual revenues come from credit card sales, and the industry is known for seasonal fluctuations in cash flows. To cover operating expenses during slow months, business owners may rely on marketing strategies, layoffs, and alternative business financing options, like the merchant cash advance.

Retail shops

Like restaurants, retail business owners collect a lot of their revenues through credit card transactions. They also experience fluctuations in sales volume because of seasons, holidays, location, inflation, and the type of merchandise. Retailers can supplement working capital by turning to merchant cash advance providers during slow times or use the proceeds from a cash advance to lower operating expenses by purchasing inventory in bulk.

Travel agencies

Vacation planning companies and travel agents can use merchant cash advances to keep the business operating during low revenue periods. The tourism and travel industries heavily depend on other factors, like recession threats, weather, large events, and natural disasters. Since businesses can fluctuate, MCAs allow travel agents to continue to network, purchase pre-sale vacation rates, and cover advertising costs even when sales are down.

Hotels

Like travel agencies, owning a hotel, ski lodge, resort, bed and breakfast (B&B), beach condo, or mountain cabin company can be a very inconsistent source of revenue. However, unlike travel agents, hotel operating costs do not decrease as much when business is slow. A cash advance provides quick business financing to pay utility bills, cover salaries and wages, and make monthly mortgage payments.

Seasonal home services

Entrepreneurs who own small businesses that are in demand only during certain seasons also use MCAs to supplement working capital during off-seasons. These seasonal services may include landscaping, pool cleaning and repair, snow removal, and swimming schools.

E-commerce stores

Online shopping is booming, and the barriers to entry are low. Many entrepreneurs create individual online stores to sell their own products or profit from affiliate marketing arrangements. Merchant cash advance lenders can help entrepreneurs purchase supplies or inventory, pay web development costs, or launch a marketing campaign.

Salons and spas

Any business owner of a hair salon, nail service shop, spa, barbershop, or other beauty service provider can benefit from an MCA. Most salon customers pay for their services using a credit card or debit card, so arranging a cash advance repayment plan is simple for these business owners. The proceeds from the financing agreement can be used for renovations, expansions, startup costs, or operating expenses.

Pros and cons of a merchant cash advance

Every personal loan or business financing arrangement comes with pros and cons. Merchant cash advances are no different. There are several benefits of merchant cash advances, but the weight of the disadvantages ranges by business type and individual entrepreneur’s preferences.

Pros of merchant cash advances

Easy application process: The application process for MCAs is straightforward and typically available online, which speeds up the approval process. While lenders may request documentation including financial statements showing monthly revenues, income tax returns, personal credit scores, and business bank account statements, eligibility for MCAs is heavily based on sales records and business plans.

Fast funding: Since MCAs are not like traditional bank loans, most merchant loan companies or online lenders can fund borrowers within 1 to 3 business days of applying. This can be helpful for small business owners who need fast working capital or operate in an industry with regular cash flow fluctuations.

Better approval odds: The underwriting process for cash advances does not rely as heavily on creditworthiness as other financing applications. Most MCA borrowers do not need to have a good credit score or provide a credit report at all. This gives business owners with bad credit or startup entrepreneurs easier access to short-term business funding.

Flexible payments: Once a business owner is approved for a merchant cash advance and the factor rate is determined, payments will be taken from credit card sales according to a predetermined schedule. Since the payment amount is set on a percentage of future sales, the amount due is lower when sales are less than expected. In periods where sales exceed expectations, the payments are higher, so the loan is paid off faster.

Cons of merchant cash advances

Financing costs: Merchant cash advances are a more expensive financing option than term loans or SBA loans. The annual percentage rate (APR) for an MCA can be as high as 350%, depending on the lender, advance amount, factor rate, origination fees, creditworthiness, and business income.

More expensive long-term: Unlike traditional loan interest rates and fees, factor rates make it much more challenging to figure out exactly how much an MCA will cost you. Since payments are set as a percentage of credit card sales financing, cash advance borrowers do not benefit from paying down the debt early, even though there is no formal prepayment penalty.

Confusing repayment terms: MCAs for small businesses often find the loan agreement and initial paperwork very confusing. This is especially true when it comes to factor rates and repayment schedules based on daily sales percentages. Merchant cash advance lenders don’t typically provide annual percentage rates in their agreements. That makes it challenging to compare MCAs with other alternative business financing options.

Alternative business financing options

If the total cost of an MCA concerns you or your business does not yet have the sales volume to make a merchant cash advance work, you may want to consider other funding options. There are several types of traditional bank loans or alternative financing options to consider. Many entrepreneurs, like this software developer, prefer to work with an alternative funder, like Biz2Credit, over a traditional lender because they offer more diverse loan options and a convenient online application process.

Invoice factoring

Invoice factoring is another type of financing arrangement where a business’s receivables become the collateral on a lump sum payment disbursed to the borrower upfront. With invoice factoring, entrepreneurs can sell their unpaid invoices to a factoring company to secure a business cash advance.

Term loans

Term loans are a traditional type of financing in which the borrower receives a lump sum payment upfront and then repays the loan over time with fixed payments. Term loans can be short-term or long-term and may be unsecured or secured loans that require collateral. The financing costs of a term loan include interest, which is determined based on the borrower’s creditworthiness.

SBA loans

The U.S. Small Business Administration facilitates several loan programs that partially guarantee a percentage of funds for approved borrowers. SBA loans offer low-interest loans with smaller down payments than traditional bank loans but have stringent requirements and require the submission of a business plan. The SBA 7(a) loan program and SBA Microloans are the most common for new business owners.

Business lines of credit

With a business line of credit, the borrower is approved for a maximum line of credit through an online lender, bank, or credit union. They can then withdraw cash at any time to address business needs as long as it remains available. Payments on a line of credit are made up of principal and interest, which are calculated only based on the funds currently withdrawn.

Bottom Line

Merchant cash advances are a great financing resource for business owners who collect credit card and debit card payments. The cash advance works where the borrower sells their future card sales to the merchant cash advance provider in exchange for a cash advance. MCAs offer borrowers fast funding and flexible eligibility requirements, but they have higher financing costs than other loan options. If you’re interested in exploring some great funding options for your business, including the MCA, reach out to Biz2Credit today.

FAQs

What is a merchant cash advance?

A merchant cash advance, or MCA, is an alternative business financing solution in which a lender gives a small business an upfront lump-sum payment in exchange for a percentage of future debit and credit card sales. The total amount repaid is usually calculated with a factor rate and is subject to interest rate assessments, too.

Who should use a merchant cash advance?

The drawbacks of MCAs outweigh the benefits, but if you have bad credit, are a startup, or otherwise can’t find more traditional means of short-term business funding, MCAs may be a viable alternative.

What are some other forms of short-term business funding?

Beyond merchant cash advances, you can find short-term business funding via working capital loans, short term loans, invoice factoring, business lines of credit, or even some SBA loan programs.

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