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Merchant Cash Advance FAQ

March 28
By Zerp Debt Law Firm |
cash

Merchant cash advances are a short-term form of business financing. In this merchant cash advance FAQ, you’ll learn about how they work, the terms you’ll want to watch out for and how to protect yourself and your business from predatory practices.

Merchant Cash Advance FAQ

How Do Merchant Cash Advances Work?

A merchant cash advance, MCA for short, allows business owners to get an advance on their future sales or revenue. Traditionally, it’s based on your debit and credit card sales. However, some MCA providers also offer ACH merchant cash advances. ACH MCAs are based on your bank account activity.
When you receive an MCA, it’ll be in a lump sum. Once it’s been disbursed, the provider will collect payments (typically daily) via your payment processor or business bank account. If it’s based on debit and credit card sales, payments will be based on a percentage of your daily sales. If it’s an ACH merchant cash advance, your payments will be fixed.

How Much Do Merchant Cash Advances Cost?

MCAs are among the most expensive forms of financing, with APRs as high as 350% in some cases. Instead of charging interest, though, you’ll be assessed a factor rate, which can range from 1.1 to 1.5. Some providers may charge additional administrative fees, so watch out for that.
You’ll multiply your advance amount by your factor rate to determine how much you’ll ultimately pay back. For example, if you’re taking an advance of $20,000 and you have a factor rate of 1.2, you’ll end up paying $24,000.
That might not seem like a lot, but MCAs are generally paid off in the short term, which increases the APR.

How Are Payments Determined?

If you’re using a traditional MCA, your daily payments will be based on a percentage of your debit and credit card sales. This percentage, often called the holdback, can range from 5% to 20% of your daily sales. This means that if your sales go down, so does your payment, but the opposite is also true. If you’re using an ACH merchant cash advance, the provider will determine the fixed daily or weekly payments. Keep in mind that while you can repay an MCA early, there’s no financial incentive to do so. Since you’re not being charged a standard interest rate, the fees generated by the factor rate are fixed, so you’ll pay the same amount whether you’re on time or early.

Is it Easy to Get Approved for a Merchant Cash Advance?

MCAs typically have less stringent credit requirements than other forms of business financing. This makes them appealing for new business owners and businesses with less-than-stellar track records with money and credit. That said, if you’re looking to get a traditional MCA, your credit and debit card sales must be solid enough to meet the MCA provider’s eligibility requirements. The same goes with an ACH MCA, but it’ll be about your overall income and expenses.

How Long Does it Take to Get a Merchant Cash Advance?

You can typically get approved for an MCA within 24 hours. After that, it may only take a few days for the funds to be deposited into your bank account. In contrast, some small business financing options can take several weeks or even months to fund. This makes merchant cash advances more attractive to small business owners with immediate cash flow problems.

How Much Can I Borrow With a Merchant Cash Advance?

MCA amounts can vary based on the provider and your sales (and expenses, if applicable). That said, you may be able to get an advance ranging anywhere between $5,000 and $500,000, depending on which provider you choose. If you’re thinking about getting an MCA, make sure you understand the payback terms run the numbers to avoid borrowing too much.

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