What is a merchant cash advance?

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What is a Merchant Cash Advance?

Merchant cash advances are advances of money in exchange for repayment out of future sales or other receipts. The advance is usually repaid based on a pre-agreed percentage of the gross daily receipts of the business, or sometimes by fixed amounts withdrawn from the borrower's business bank account. Sometimes the business' credit card payment processor handles repayment automatically to ensure a frictionless process for the owner and to avoid missed payments, but often the merchant cash advance provider debits the daily payment amount directly from the business back account via ACH, without going through the credit card processor.

Determining loan eligibility is simple, since the borrower usually only needs to document a history of steady receipts at or above a certain threshold, along with a certain amount of time in business. Each merchant cash advance provider has different underwriting guidelines, and the specific requirements vary from provider to provider. Even companies that don’t have good credit may be able to obtain a merchant cash advance, since the primary concern of most merchant cash advance providers is the availability of cash receipts. However, most cash advance providers also require personal guarantees from the owner of the business.

Why Are Merchant Cash Advances Needed?

While a cash advance can be used for just about any business expense, businesses typically use them to cover unplanned expenses. For example, businesses in the midst of renovations may encounter an unexpected condition that adds to the cost. A one-time purchase - say, to install a new walk-in freezer for a restaurant - may not be affordable except through the short-term funding provided by a merchant cash advance.

Business owners who are falling behind on operating expenses - equipment leases, car payments, and payroll costs - may also look to a MCA to cover these short-term debts when business is unexpectedly slow.  The problem is that the COST of these merchant cash advances is so high that a business has to be careful about using them as a regular source of funding.

Merchant Cash Advance Cost

The amounts offered by merchant cash advance providers typically range from $2,500 to $250,000, with a daily repayment amount of 10-50% of the daily receipts of the business. Repayment is deducted either from the daily credit and debit card receipts of the business, or via ACH withdrawals from the business bank account. Advances are typically approved within a week from the date that the application is received.

With payments this high, many business owners struggle to maintain a manageable cash flow while repaying their merchant cash advances. If you are a business struggling with merchant cash advances, the first step is to explore your options for debt relief. Resources such as Creditor’s Relief can help with reducing your payments and sometimes with the overall balances owed to merchant cash advance lenders.

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