When you run a small business, it can be difficult to manage cash flow, especially when the income is less steady than what you’re paying out. So, what happens when you’re waiting on payments from clients but still have bills that have to be paid?

One option is a merchant cash advance. This type of financing gives small businesses a short-term solution: quick cash to keep up with their bills in exchange for future earnings. If they qualify for an advance, business owners can score a quick and relatively easy $10,000 cash advance or more. The upside with these advances is that they can deliver money without a lot of hassle. The downside, however, is that you’ll generally pay an extremely high amount of interest and other charges in exchange.

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How a Merchant Cash Advance Works

Here’s how the transactions play out: Business owners take an upfront sum of cash in exchange for a percentage of their future earnings—that is, future credit card sales. In that sense, a merchant cash advance actually “buys” a percentage of that company’s future revenue instead of loaning the money outright. Merchant cash advances can range from a few thousand dollars up to $250,000 or more.

Since merchant cash advances aren’t technically loans, they are able to skirt most federal rules and laws that govern business loans and protect consumers. It’s crucial for you, as a business owner, to know what you’re getting into before you dive in. Merchant cash advance businesses “are sort of the payday lenders of the small business community,” says financial advisor Scott Tucker of Chicago. “You’re trading future gross revenue for money today. I’m not saying that they should never be used, but they need to be considered with caution.”

Here are a few tips that can help you detect predatory merchant cash advances:

Read the fine print.

Better yet, go over it with your attorney.

Consider the alternatives.

Could you qualify for a loan from the Small Business Administration instead? If so, you would likely get a better deal with a lower total cost.

Do some comparison shopping.

You can sometimes get a lower rate with nontraditional peer-to-peer lending firms like Lending Club or Prosper or a traditional bank.

Do the math.

Because merchant cash advance loans don’t charge interest in the same fashion as traditional loans, it’s easy to misunderstand their real terms. Make sure to run the numbers to figure out the real interest rate you’ll pay over time. If your upfront loan is for $10,000, for example, but your merchant cash advance loan asks for 6 percent of your credit card sales until you reach $12,500, then you will have paid a 25 percent premium to borrow the money.

Avoid the vicious circle.

Some small businesses with cash flow issues get stuck in a cycle of taking out a new merchant cash advance loan to pay off another. Called “stacking,” this strategy will eventually siphon off a large percentage of a company’s earnings, leaving it in a still more perilous financial position. Merchant cash advances provide a temporary infusion of cash, but they aren’t a long-term solution.

Pros and Cons of a Merchant Cash Advance Loan

A merchant cash advance loan can truly save the day when your business needs money fast. Still, there are certain advantages and disadvantages to keep in mind before you get into the merchant cash advance game.

Advantages
  • Easier requirements for credit and collateral.

    You may not need an extensive credit history or any collateral to qualify for a merchant cash advance loan.

  • Faster turnaround.

    While banks are known for red tape, merchant cash advance loans require little paperwork and help you get your money quickly.

Disadvantages
  • Higher than average cost.

    Merchant cash advance loans come with considerably higher costs than traditional loans, usually a 25 percent effective interest rate or more. When you look at the effective annual percentage rate, or APR, it can be much higher: If you have to repay the loan within 6 months, as required by many lenders, the effective interest rate is 50 percent. And as loan provider Fundera notes, merchant cash advance rates can even surge up into the “triple digits.”

  • You have to switch you credit card processing system.

    Financiers will want to measure your revenue directly, so they may require a technology upgrade for your business.

  • No credit advantage.

    Unlike traditional loans, merchant cash advances won’t help you build your personal or business credit.

Major Companies that Offer Merchant Cash Advance Loans

Loan Provider Typical Amount Offered Features and Benefits
Green Capital Credit Loan amounts vary, but you must have at least $10,000 a month in revenue and be in business six months or more to qualify.

With Green Capital Credit, you can:

  • Get approval for your loan in less than 24 hours
  • Get an instant transfer to your bank account once your loan is approved
  • Apply online without ever visiting a bank
Cash Bloom Loan amounts between $5,000 and $1,000,000 are available to qualified borrowers who meet income requirements.
  • Get approval in as little as 24 hours.
  • Submit your loan application online, and with little hassle.
  • Cash Bloom says they offer the lowest rates in the industry.
National Funding Merchant cash advance loans up to $250,000 are available.
  • Get a same day approval and cash in less than 24 hours.
  • Must be in business at least six months and have monthly transactions of $3,000 or more
  • No hidden fees or upfront costs.
Express Business Loans Loan amounts of any kind are considered based on application details. Only businesses with six months’ history and $10,000 in monthly revenue should apply.
  • Get loan funding in less than 24 hours.
  • Early payoff discount available
  • No prepayment penalties
Fundera Loan amounts between $2,500 and $250,000 are available to qualified applicants.
  • Repay your loan with 8 percent and up of daily credit card sales
  • Bad credit is okay
  • Receive your funds in less than 24 hours
CAN Capital MCAs range from $5,000 to $150,000 for qualified businesses.
  • Get approval in just a few days

How to Get a Merchant Cash Advance Online

While some merchant cash advance providers operate out of a brick and mortar storefront, you can also apply for a MCA online. By shopping for a MCA online, you can compare loan terms and offers quickly and easily. Also, if approved, you can usually get your funds transferred directly to your account without having to visit a bank.

Compare providers

Check out various online MCA providers to find a firm that offers loan terms you feel comfortable
with.

Complete an online
application

Provide required personal information and proof of your monthly business revenue.

Follow up with any additional information your lender requests

This may include a copy of your drivers’ license, business tax returns, bank merchant account statements or your personal credit report.

Get approval and receive funding for your loan

Most of the time, you can have your funds transferred directly into your bank account.

Expert Q&A

Scott Tucker Scott Tucker Expert

To learn more about merchant cash advance loans, we reached out to small business expert and financial advisor Scott Tucker of Scott Tucker Solutions, Inc. in Chicago.

How can business owners figure out how much these loans actually charge in terms of their interest rate?

“Factor rates” are how fees are quoted. Factor rates usually are anywhere from 1.14, to 1.48. To figure out how much you’ll repay, you can multiply the amount borrowed by the factor rate.

Example: You borrow $100,000. If your factor rate is 1.3, you’ll repay $130,000. Is it worth the $30,000 in interest? It may be, or it may not be. It depends.

What are some instances where a merchant cash advance loan makes sense?

Maybe you need inventory that you’ll quickly sell at a healthy profit at a once per year sporting event. If you can sell that $100,000 in inventory for $200,000 in a weekend, then sure, the $30,000 in interest is probably “a good deal.” A merchant cash advance could be for you if your business has seasonal ups and downs. But merchant cash advances are the most expensive borrowing option you have.

Most merchant cash advance lenders will want you to repay the loan in-full within 9 months, but feel free to ask for 12 months, or whatever you need. A “normal” repayment timeframe is 4 to 18 months.

However, these really are intended to be short-term loans, so don’t expect something like 24 months. Something you really need to think about is how tight your daily cash flow will be during loan repayment.

If you’re not making it now, how will you do it when the lender is taking part of your merchant account receipts?

Let me say that “no debt” is the best position to be in. But I understand that this can be difficult to make happen in your business.

Small business owners who lack collateral may see merchant cash advances as an appealing option. And your personal credit score may not matter much, either.

What does the typical MCA customer look like?

A common merchant cash advance borrower has annual revenue of $180,000, a personal credit score of 550 and has been in business for two years. If you don’t exactly fit these stats, don’t hesitate in applying for the advance, as your merchant account statements are what matters most.

You don’t even need to be turning a profit, you just need to be able to show that you run enough revenue through your merchant account.

Resources

5 Ways to Improve Your Business Credit Scores

Learn how to improve your business credit score in order to position yourself for a traditional loan with a lower interest rate.

Gather the Info You’ll Need

The SBA offers details on the information you’ll need to qualify for a SBA loan backed by the government.

Government Grants for Small Businesses – Think You Qualify?

Find out about small business grants that could improve your business cash flow and overall profitability.

Improve Business Credit

Credit reporting agency Experian offers tips that can help you boost your business credit score.

Is Bad Credit Stopping You from Getting Small Business Loans?

The SBA blog offers insights on whether having bad credit will cost you more business capital on the long run.

Merchant Cash Advance Loan versus Business Loans

The Kabbage blog highlights some of the biggest differences between merchant cash advance loans and traditional small business loans.

Payday Loans and Cash Advances

The Federal Trade Commission offers details on cash advances, their drawbacks and what to watch out for.