Key Takeaways
- A merchant cash advance (MCA) provides businesses quick access to capital by leveraging future credit/debit card sales, making it a flexible solution for short-term cash flow gaps.
- Repayment occurs through one of two methods: either the MCA provider deducts a fixed percentage (typically 5–20%) from daily card transactions, or they withdraw scheduled payments directly from the merchant’s bank account on an agreed-upon schedule.
- As MCA can be expensive, other funding companies often work with merchant cash advance brokers to help them sell their services to businesses.
- Alternatives to MCA include business lines of credit, online term loans, invoice factoring, and SBA Express Loans.
Many businesses experience cash flow gaps. To avoid having said gaps become bigger issues like missed monthly payables or business closure, the business may turn to alternative small business financing to get the cash injection needed to keep the company afloat.
One popular financing choice is a merchant cash advance (MCA). While this is not formally considered a loan, it’s widely used as such, particularly among companies that handle large volumes of credit and debit card transactions every month.
If you’re a business owner considering a merchant cash advance for your company, you must understand how the process works. In this article, we’ll explore the basics of merchant cash advances – everything from the regulations associated with obtaining one to merchant cash advance brokers and how you can find the right one for you.
How Does a Merchant Cash Advance Work?
A merchant cash advance (MCA) is a type of financing that gives a business access to capital in exchange for a portion of its future revenue. The repayment for the advanced cash can be done in one of two ways: either the financing company takes an agreed-upon percentage out of the business’s daily credit and debit card transactions, or the merchant cash advance company withdraws the repayments directly from the merchant’s bank account on an agreed-upon schedule.
Unlike conventional loans, MCA companies do not charge an interest rate. Instead, they use a factor rate (expressed as decimals) for their cash advances. Similar to interest rates, the factor rate will depend on the risk the business poses to the financing company. The less risky the business is as a borrower, the lower the factor rate will be.
To calculate the total amount you’d need to repay, multiply the advanced amount by the factor rate. For example, if you receive a $50,000 cash advance from a merchant cash advance company at a factor rate of 1.5, the total repayment amount will go up to $75,000.
The exact terms for merchant cash advances will vary based on the financing institution you work with, but here’s a ballpark look at what you can typically expect:
- Advance amount: $2,500 to $500,000
- Factor rate: 1.1 to 1.5
- Deduction percentage: 5% to 20% of the daily debit/credit sales
- Payment period: 3 months to 2 years
- Payment frequency: Daily or weekly
Although accessible even with bad credit, merchant cash advances can be expensive, as seen in the calculation above. That is why most financing experts recommend them only as a last resort— if a business urgently needs access and can’t qualify for traditional loans.
How to Use a Merchant Cash Advance
Merchant cash advances, like any other financing options, offer spending flexibility to their users. Generally, merchants will try to get an MCA for the following purposes:
- Additional working capital
- Bridging temporary cash flow gaps
- Buying equipment at a discount
- Large inventory reordering
- Refinancing existing debts
What is a Merchant Cash Advance Broker?
An MCA broker is a person or company that connects MCA providers and SMEs or “merchants.” Most companies that sell MCAs rely on brokers to connect cash-strapped businesses to them. Typically, brokers have good interpersonal skills and a rich knowledge of MCAs and other types of funding. In most cases, these brokers not only handle merchant cash advances but also have experience with different financing options.
MCA brokers are usually paid on a commission basis. Most can earn up to 11% of the advanced amount if customers sign up for their services. That means that if a company advances $25,000, the broker could get $2,750 in commission.
How to Pick the Right Merchant Cash Advance Broker
It’s important to note that when you decide to work with an MCA broker, you must check their qualifications and core competencies. Merchant cash advances, like other financing options, are large investments, and applying for one is a major decision for any company. You would want to work with only the best and most reputable cash advance brokers in the industry.
That said, when researching or looking for brokers, you want to check for the following:
- Educational background and experience
- References and reviews
- Fees compared to other brokers
- Interpersonal skills
- Licenses
1. Educational Background and Experience
One of the first things to check when considering a broker is their educational background and experience in financing. You want to work with someone who has extensive knowledge of the merchant cash advance industry and, ideally, has been a business lender before.
Working with an MCA broker with extensive experience also makes the application process smoother. They can answer your questions and clarify any confusion you might have.
2. Reference and Reviews
Before fully committing, ask your prospective broker if they have references. If they don’t or refuse to give you contact information, that’s a red flag. If they do provide you with a list of references, do your due diligence and call them to inquire about the broker’s performance, how professional they were, and whether or not the contact person would recommend them.
You should also conduct an online search. Does the broker have a website you can check out? If so, does the site have client testimonials? Are there online reviews you can access? If you perform a search and are unable to find anything about the individual or company, consider that a red flag as well.
Moreover, the broker should be able to prove they work with an MCA company that honors the Small Business Borrowers’ Bill of Rights.
3. Compare Fees with Other Merchant Cash Advance Brokers
Beware of brokers that charge upfront fees. While brokers get paid when a deal is finalized (at closing), you shouldn’t have to pay anything beforehand. If you do work with a broker and the financing doesn’t go through, they shouldn’t charge you. Make sure to ask brokers you’re considering if they charge any fees upfront and how much it will cost once the deal closes. This will help you compare your options and choose the right broker.
4. Interpersonal Skills
Merchant cash advance brokers should present themselves professionally. They should be good at explaining how the financing option works for businesses in a simple way. Regardless of their potential clients’ background or where they come from, they should be able to speak to them professionally and with confidence.
5. Licenses
More states now require MCA brokers to hold licenses (e.g., New York’s Commercial Finance Disclosure Law or California’s lending laws). Unlicensed brokers may charge hidden fees or push unfair terms. To avoid this, always check your state’s financial regulator website (e.g., NMLS Consumer Access) to verify a broker’s credentials before signing any agreement.
Merchant Cash Advance Alternatives
If you find merchant cash advances too expensive and don’t want to risk experiencing cash flow gaps just to make payments, you might consider taking out a loan instead. Many offer spending flexibility, so you can cover almost any business initiative – seasonal cash flow gaps, buying equipment, or meeting day-to-day expenses.
Here are some of the financing options you can choose from:
1. Business Lines of Credit
A business line of credit can be a helpful financing resource for cash-strained businesses. Once approved, the company can access its credit line whenever needed. This can be a convenient financing option if you find yourself constantly experiencing cash flow gaps, especially during slower seasons.
With a business line of credit, you will only have to pay the cash you use, plus interest. As you pay off what you owe, the available amount goes back up, and you can use the funds again as long as you don’t exceed the set credit limit.
Note that, unlike MCAs, business lines of credit let you compare offers from multiple lenders upfront, ensuring you secure the best rates. Also, if you do get approved, the lenders may require you to sign a personal guarantee agreement. This serves as your legal promise to repay the loan using your personal resources if the business becomes unable to repay the loan.
2. Online Term Loans
Term loans offered by online lenders are among the most accessible financing options for small businesses, especially those that are still in their early stages of operation. Online lenders are usually more flexible regarding the business’s qualifications as they’re not bound by the same regulations that control large banks. That said, they have more freedom in choosing who they want to lend to.
With term loans from online lenders, you’ll receive a lump sum of money upfront.
Depending on the length of the term, you can get between $5,000 and $5 million in funding. The proceeds can be used to fund a wide range of business initiatives, including commercial property acquisition, business acquisition, equipment purchasing, hiring staff, and others. You then repay the loan amount in increments (plus interest) within a specific period, or term.
One of the most important things to remember about term loans is that the financing terms you receive will depend on your credit standing. Essentially, the more creditworthy you are, the lower your interest rate will be. In contrast, businesses with a less-than-stellar credit standing may be charged a higher interest rate.
3. Invoice Factoring
Businesses that offer net term payments to their customers may often find themselves short on cash. For that reason, many of them sell their invoices to factoring companies to free up the capital tied up in their customer invoices. This financing method is called invoice factoring.
With invoice factoring, the business will have to give up control of its accounts receivable ledgers to the factoring company. As the new owner of the outstanding invoices, the factoring company will be responsible for collecting the unpaid invoices. Since the customers pay the factoring company directly, they will be aware that the merchant is working with a factor.
Once the customers pay the invoices, the factor deducts the advanced amount, plus the fees, and returns the remaining balance to the business.
4. SBA Express Loans
The SBA Express loan is an extension of the SBA 7(a) loan, which the federal government backs. As such, you can use it for the same purposes. You can allocate it for equipment purchases, real estate investments, covering cash flow gaps, and other business-related purposes.
SBA Express loans are capped at a maximum of $500,000. These loans remain a competitive option due to their government-backed guarantees and lower interest rates compared to traditional bank loans.
One downside of this type of loan is that you must be creditworthy to qualify. In most cases, banks and other lenders may require a credit score of 650 or better. Besides credit scores, you should have at least two years of business history and a solid financial track record.
5. Revenue-Based Financing
Revenue-based financing (RBF) provides upfront capital in exchange for a percentage of future revenues (typically 2–10% per month). Unlike MCAs, which require fixed daily or weekly payments, RBF automatically adjusts with a company’s income: payments scale up during strong revenue months and decrease when sales slow down. This flexible model often eliminates personal guarantees, reducing risk for business owners.
RBF is particularly well-suited for businesses with recurring revenue streams, such as SaaS platforms and e-commerce brands, as it aligns repayment with natural cash flow cycles.
Final Thoughts: Should Your Business Apply for a Merchant Cash Advance?
Overall, merchant cash advances can be a helpful financial resource if you quickly need access to additional capital and can’t qualify for conventional small business loans. However, if you plan to proceed with your application, do so cautiously. Otherwise, you might end up with business financing that you can’t even afford in the first place.
Moreover, always perform a background check if you intend to work with a merchant cash advance broker. Ask about their experience, specifically in your industry. Inquire about their rates and check their references and online reviews. Merchant cash advances are a big decision, and you want to make sure that you’re working with a reputable company and broker.
Are you struggling to find the right financing for your business? Contact us today to explore tailored funding solutions and get answers to your financial questions. Don’t let cash flow challenges hold you back; connect with us now and take the first step towards securing your business’s future.
FAQs
What is an ISO merchant cash advance?
In financing, ISO stands for independent sales organizations. ISO merchant cash advances are financing options in which an intermediary is involved. The intermediary acts as a middleman between the business and the merchant cash advance provider or company.
Where can I find a reputable merchant cash advance ISO list?
Identify reputable merchant cash advance providers by consulting your state’s financial regulator website and the NMLS Consumer Access database. You can also look into industry associations such as the Small Business Finance Association, as ISOs often have networks of brokers.
Is merchant cash advance regulated?
Merchant cash advances are legally considered purchases of future revenue, not loans, so they avoid federal lending regulations. However, several states (e.g., New York, California, and Virginia) now require MCA providers to disclose equivalent APRs and comply with stricter transparency rules.
Additionally, the Small Business Borrowers’ Bill of Rights remains a critical benchmark for fair practices. Always verify whether your provider or broker adheres to state-specific licensing requirements, as penalties for unlicensed brokers have increased in recent years.
