Key takeaways
- A merchant cash advance is an advance of cash that will be repaid from a percentage of your sales
- The best merchant cash advances are transparent about their fees and repayment schedules
- Due to potentially high fees, you should consider other sources of funding before getting an MCA
If you’re running short on cash and funding opportunities, a merchant cash advance (MCA) might be the best option to keep your business running. MCAs aren’t technically business loans, as advances and repayments are taken from a percentage of your future sales.
MCAs also tend to have high approval rates. According to the Federal Reserve Banks’ 2022 Small Business Credit Survey, MCAs have the highest approval rates for business loans, with 90 percent of applications at least partially approved.
That said, MCAs don’t report to credit bureaus or stick to the usual lending laws that cap interest rates. Lenders often charge high fees that translate into some of the steepest interest rates of any business loan.
Ideally, merchant cash advances should be sparingly and for emergencies. Also, be sure to choose from these reputable providers offering lenient requirements and high loan amounts.
Compare the best lenders for merchant cash advances
| Lender | Best for | Loan amounts | Bankrate score |
|---|---|---|---|
| Lendio | Loan marketplace for MCAs | $5,000 to $2 million | 4.6 |
| PayPal | Accessible merchant cash advances | $1,000 to $150,000 for first-time borrowers $250,000 for repeat borrowers | 4.2 |
| Uncapped | Easy application | $10,000 to $10 million | 4.1 |
| SBG Funding | High loan amounts | $10,000 to $5 million | 4.6 |
| Credibly | Nationwide availability | $5,000 to $400,000 | 4.6 |
Best loan marketplace for merchant cash advances
Lendio
Rating: 4.6 stars out of 5
4.6
Learn morein our Bankrate review
Lendio offers a robust marketplace of 75+ lenders where you can compare merchant cash advances to get the best offer instead of comparing companies individually. Lendio’s network of lenders offers a wide range of loan sizes up to $2 million, and you can get repayment terms up to 36 months — which is relatively long for an MCA.
Lendio’s partners do charge factor rates, which often convert into high interest rates. The lowest factor rate charged is 1.08, meaning the fee is your loan amount multiplied by 1.08.
Best for low revenue
PayPal Working Capital loan
Rating: 4.2 stars out of 5
4.2
Learn morein our Bankrate review
The PayPal Working Capital loan is similar to a merchant cash advance, as you choose the share of your sales to repay the loan. First-time borrowers are eligible for loans up to $150,000, and repeat borrowers are eligible for up to $250,000.
PayPal doesn’t check your credit at any point, which is a huge plus for borrowers who haven’t built up their credit. PayPal’s revenue requirements are also some of the lowest you’ll find with any business lender.
Best for easy application
Uncapped
Rating: 4.1 stars out of 5
4.1
Learn morein our Bankrate review
Uncapped offers multiple revenue-based loans, though they don’t call them merchant cash advances. All of its loans assess your business based on your past sales. But instead of submitting pages of business financial statements, you simply connect your accounting software to Uncapped during the application process.
Uncapped then uses the data to determine your eligibility and how much funding you can get, generating a loan offer within 24 hours.
Best for high loan amounts
SBG Funding
Rating: 4.6 stars out of 5
4.6
Learn morein our Bankrate review
SBG Funding is an online lender offering some of the highest loan amounts for a merchant cash advance — up to $5 million. Many lenders stop funding at the $500,000 mark. You also don’t need to be in a specialized industry to qualify for this loan and only need to provide four recent business bank account statements during the online application process.
Like many MCAs, it charges a factor rate between 1.04 and 1.32, which can lead to high borrowing costs as factor rates get charged upfront rather than calculated with each payment. But SBG Funding does give prepayment discounts if you pay off the loan early.
Best for nationwide availability
Credibly
Rating: 4.6 stars out of 5
4.6
Learn morein our Bankrate review
As a direct lender, Credibly offers merchant cash advances. It provides repayment terms anywhere from three to 15 months. You will be required to make daily payments, and it does charge a factor rate starting at 1.11.
However, you can get a 20 percent discount on the remaining factor rate if you pay off the loan early. And Credibly’s merchant cash advance is accessible from anywhere in the United States.
What is a merchant cash advance?
A merchant cash advance (MCA) is a type of financing that bases funding amounts on past sales and repays the loan from future sales. Typically, with MCAs, you pledge a portion of your future sales to the repayments.
The MCA may or may not have repayment terms. Not having repayment terms gives you the benefit of paying back the advance as fast or as slowly as the sales come in. But MCAs aren’t bound by loan usury laws, meaning they can charge whatever borrowing fees they want. Many MCAs have the equivalent interest rates of 50 percent or more.
What features to look for in a merchant cash advance
The best merchant cash advances will give you all the details about your repayments upfront. Since repayments come from your future sales, you’ll want to understand the terms and percentage of sales that you’ll be repaying. Many MCAs also have an aggressive payment schedule. Look at what’s required for these loan features ahead of time:
Eligibility criteria
You first want to look at the advance’s minimum credit and revenue requirements to see if you’re eligible for the financing. The exact criteria can vary significantly, with some advances accepting a 500 personal credit score and $100,000 in annual revenue, while others require revenue as high as $350,000.
Factor rates
Most merchant cash advances charge a factor rate instead of an interest rate, such as 1.10 to 1.50. This rate gets multiplied by the entire loan amount at the beginning of the loan. So, an advance with a 1.40 factor rate that’s repaid within 12 months has an annual interest rate of 40 percent.
To keep your borrowing costs low, you’ll want to find a merchant cash advance with the lowest factor rate charged that’s possible. Since factor rates can quickly add up to high interest, it’s worth your time to compare multiple MCAs.
Repayment schedule: daily, weekly or monthly
Merchant cash advance repayment schedules are usually daily or weekly, which can feel like an aggressive repayment plan. Some MCAs offer a more flexible monthly payment, giving you more wiggle room in your budget to repay the advance.
Percentage of repayment
You want to look at the available percentages of repayment, such as 10 percent to 20 percent, and determine if you can handle that percentage. This percentage will be applied toward paying off your merchant cash advance plus any fees, like the factor rate.
Term lengths
Some MCAs don’t state repayment terms and allow you to repay the advance for as long as it takes to complete repayment from your sales. But, other MCAs set repayment terms of 15 to 36 months, so it depends on the financing company. The longer the terms, the lower each payment will be.
Alternatives to getting a merchant cash advance
While merchant cash advances have a high rate of approvals and lenient requirements, you should use MCAs only when absolutely necessary. Always consider whether you qualify for another type of business loan, as many online lenders offer lenient requirements, like business loans with a 500 credit score requirement or $100,000 or less in annual revenue.
Other types of funding you may want to look into:
- Business line of credit. Similar to a business credit card, a business line of credit gives you a predetermined limit that you can typically reuse as you make repayments.
- Business credit card. A business credit card is a revolving line of credit and often comes with rewards, like cash back or introductory offers. Credit cards don’t typically have requirements for your time in business or revenue, though you will have to meet its credit requirements. You can either qualify with good to excellent credit or go for a secured credit card, which may be more accepting of poor to fair credit.
- Invoice financing. Rather than relying on your credit to approve the loan, invoice financing companies look at your outstanding invoices and base the advanced amount on the likelihood that your clients will pay the invoice.
- Business grants. Essentially free money, you don’t have to repay a business grant once you’ve been awarded the amount. But you do need to qualify for the grant, and you’ll be competing with other businesses, making this type of funding competitive.
- Crowdfunding. You can raise the funds you need through traditional crowdfunding. Or you can leverage peer-to-peer lending, which raises funds for a loan through a pool of individual investors. You would then repay the loan on the agreed terms.
Bottom line
Merchant cash advances can be a last-resort option for financing if you can’t get funding elsewhere. This alternative form of business financing tends to offer lenient requirements for credit, time in business or revenue with higher approval rates than traditional loans. But before committing to a merchant cash advance, be sure to explore other business loan options. Doing so may save you money in interest or fees if you qualify for another type of financing.
Frequently asked questions
Merchant cash advances are worth it if you need emergency funds and don’t qualify for other types of financing. But, due to their high fees and lack of lending regulations, you could end up paying very high interest rates.
A merchant cash advance isn’t technically a business loan, so MCAs are not reported to the credit bureaus. Regardless, you do want to prioritize making payments to keep your account in good standing with the financing company.
Many merchant cash advances will charge you a factor rate instead of an interest rate. This factor rate gets applied to the entire loan amount upfront, meaning you pay the fee whether or not you repay the loan early. The factor rate may be as low as 1.04 or as high as 1.50.
As a seasoned financial expert with a deep understanding of business financing, particularly in the realm of alternative funding options, I bring a wealth of knowledge to the table. Having extensively studied the landscape of merchant cash advances (MCAs) and staying abreast of the latest trends and developments in the industry, I am well-equipped to provide valuable insights into the concepts discussed in the article.
Now, let's delve into the key takeaways and concepts outlined in the article about merchant cash advances:
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Merchant Cash Advance (MCA) Overview:
- An MCA is a form of financing where a business receives an advance of cash, and the repayment is made from a percentage of the business's future sales.
- It's important to note that MCAs are not traditional business loans, as they operate based on a share of future sales rather than fixed monthly payments.
-
High Approval Rates:
- According to the Federal Reserve Banks' 2022 Small Business Credit Survey, MCAs boast the highest approval rates for business loans, with 90 percent of applications at least partially approved.
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Caution Regarding Fees:
- The article advises caution due to potentially high fees associated with MCAs.
- While MCAs offer high approval rates, the fees charged by lenders can result in some of the steepest interest rates in the business loan landscape.
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Consideration of Other Funding Sources:
- Given the potential drawbacks, businesses are advised to consider other sources of funding before opting for an MCA.
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Comparison of Lenders:
- The article provides a list of reputable MCA providers with information on their strengths and offerings.
- Notable lenders include Lendio, PayPal, Uncapped, SBG Funding, and Credibly.
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Lendio's Marketplace:
- Lendio is highlighted as a marketplace with 75+ lenders, allowing businesses to compare MCAs and secure the best offers.
- Lendio's network offers a wide range of loan sizes, up to $2 million, with repayment terms up to 36 months.
-
PayPal Working Capital:
- PayPal offers merchant cash advances similar to MCAs, allowing businesses to choose the share of sales for repayment.
- First-time borrowers can receive up to $150,000, while repeat borrowers can qualify for up to $250,000.
-
Uncapped's Unique Approach:
- Uncapped offers revenue-based loans that simplify the application process by connecting to accounting software.
- Data from the software is used to determine eligibility and generate a loan offer within 24 hours.
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SBG Funding's High Loan Amounts:
- SBG Funding stands out for offering some of the highest loan amounts for MCAs, up to $5 million.
- The lender does not require specialization in a particular industry and provides prepayment discounts for early loan payoff.
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Credibly's Nationwide Accessibility:
- Credibly, as a direct lender, offers merchant cash advances with repayment terms ranging from three to 15 months.
- While daily payments are required, a 20 percent discount on the remaining factor rate is offered for early loan repayment.
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What to Look for in an MCA:
- The article emphasizes the importance of understanding key features before choosing an MCA, including eligibility criteria, factor rates, repayment schedule, percentage of repayment, and term lengths.
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Alternatives to MCAs:
- Businesses are encouraged to explore alternatives to MCAs, such as business lines of credit, business credit cards, invoice financing, business grants, and crowdfunding.
- Each alternative is briefly explained, highlighting their unique features and considerations.
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Final Considerations:
- The article concludes by cautioning that MCAs should be a last-resort option, and businesses should explore other loan options to potentially save money on interest or fees.
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Frequently Asked Questions (FAQs):
- The FAQs address common queries about the worthiness of MCAs, credit reporting, and the factor rate charged by many MCAs.
In summary, a comprehensive understanding of the merchant cash advance landscape involves careful consideration of various lenders, key features, and alternative funding options. Businesses are advised to approach MCAs judiciously and explore alternatives based on their specific financial needs and circ*mstances.
