A Merchant Cash Advance (MCA) is a type of business financing where a third-party company provides immediate capital in exchange for part of the future credit card transactions. Think of it as a short term loan based on expected income from your credit card sales. The funds you receive are yours to work with, and only when your sales drop do you make repayments on the loan.
MCA providers don’t typically charge an upfront fee, but instead take a percentage of your daily credit card sales until they’ve reached their agreed upon repayment threshold (typically 50-65%). After which point, future transactions are yours to keep. MCA providers can also help you with marketing advice and budgeting to help cover the repayment period.
How Does an MCA Work?
There are two types of Merchant Cash Advances you can receive: front-end and back-end. The difference is in how they calculate their repayment threshold, which also means that there’s two ways you can profit from them. This makes it easier for you to choose which type of MCA is best for your business.
Front-end cash advances are most common because they only assess repayment on future card transactions above a certain amount, rather than all transactions throughout the month. There’s no set threshold and it can be as low as $1 for every $200 worth of sales. This means that you’re charged for all sales until your business reaches the repayment threshold. If your outstanding balance is higher than this, then you need to try and increase sales again so that they can reach their threshold. This method of payment is very beneficial if your business sees a steady stream of daily income.
Back-end cash advances on the other hand assess the repayment based on card sales throughout the month. There’s a set threshold, typically 50-65% of all daily credit card sales (after processing fees), and your repayments will be made in relation to how much you’ve earned thus far. There’s no point where outstanding cash advances are zero, but this method is better for you if your business experiences a slow period or if you’re just getting started.
It’s important to remember that you’re still required to pay your merchant services provider and any fees they charge separately. However, the less you pay in processing fees then the more of your MCA repayments that can be sent towards repayment for your advance. Your MCA provider will offer free quotes with no obligation to take their deal, but you can rest assured knowing that they’ve done their research to make you the most competitive offer.
How Much Money Can I Get?
Since MCA providers are only providing you with short term financing, there’s no set amount that they’ll be providing you with. The process begins when your business negotiates an advance amount during the application process, which is based on your projected credit card sales. The best part about MCA providers is that they can work with you to find an advance amount that suits both your business and personal needs.
The main factor in determining the size of your MCA will also be primarily affected by how much risk your merchant services provider is willing to take on. The more money your business can bring in, the lower their risk and the better terms you’ll receive. So it’s important to be honest with them about how much you expect your business will make so that they don’t overextend themselves for a risky deal.
Another factor is market competition, which makes it harder to achieve higher advance amounts if there are larger competitors operating in your industry.
Why Take An MCA?
Merchant Cash Advances provide you with a temporary funding solution so that you can take full advantage of peak sales periods without having to worry about long waiting times for traditional loans. They also allow you to pay off large expenses, such as leases or new equipment, as well as creating a buffer for your business by saving the advance amount in the short term. You can even reach further sales with an MCA payment, since you’ll have less processing fees to deal with and more money going straight towards your bottom line.
