What is Merchant Cash Advance?

With the costs of borrowing rising, small business owners have been searching for ways to get loans that are not only cheaper but also more flexible. Merchant cash advances (MCAs) provide financing upfront from a provider and pay back according to your daily sales volume in percentage form rather than through interest-only payments like traditional bank credit cards do.

Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses’ daily sales. A company’s remittances are drawn from the revenue generated by the business daily until the obligation has been met. Most providers form partnerships with payment processors or banks and then take a fixed or variable percentage of a merchant’s future sales.

In a world where interest rates are low because of economic uncertainty, some people may be tempted to take out loans from high-interest lenders. Though merchant cash advances aren’t really loans at all – they’re more like credit given to the merchant based on the expectation of future revenue given their full potential.

Benefits of Merchant Cash Advance

MCA’s offer many benefits over other types of financial assistance available today including being able access funds quickly without having any long waiting periods ahead hoping they come free enough later when applying.

This structure may have some advantages over the structure of a conventional loan. Payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner’s personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan.

Merchant cash advances are a good option for small business owners who collect payments through cash, checks or credit cards (as opposed to invoices), have a high volume of sales, need funding quickly or who may not qualify for a traditional bank loan.

Common Uses for a Merchant Cash Advance

One of the most common reasons a small business owner would choose a merchant cash advance is to access quick funding for short-term business expenses. Other common uses for MCAs include:

  1. Fill cash flow gaps: If a small business has fluctuating cash flow, which may prevent them from making bill payments or payroll, a merchant cash advance can function as supplementary funding until cash flow returns.
  2. Emergency/unexpected expenses: If short-term business loans are not accessible to cover unexpected expenses, small business owners can opt for a merchant cash advance that could get them cash within a couple of days.
  3. Inventory: For small businesses with consistent sales income, an MCA can be used to purchase inventory and then repaid with a percentage of the revenue from inventory sales.
  4. Seasonal fluctuations: Businesses that experience seasonal revenue fluctuations may find themselves in a bit of financial hardship when the times get tough. Fortunately, small business owners can take advantage and secure an advance on their next payment from merchant cash advances to cover any losses they might expect during slower seasons.

Businesses of any size can use merchant cash advances, but they are common for businesses that are:

  • Pioneers in new industries
  • Those who have low or no credit, and don’t want to apply for a poor credit business loan
  • Small business owners who don’t have collateral to offer 
  • Unable to qualify for loans from banks, credit unions, or online lenders

Merchant Cash Advance Process

An agreement is made between the small business and the MCA provider regarding the advance amount, payback amount, and holdback percentage. Once an agreement is reached, the advance is transferred to the business’ bank account in exchange for a future percentage of receivables or credit card receipts.

Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the MCA. This is a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral required for a traditional small business loan.

Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. Should transactions be lower on any given day, the draw from the merchant account will also be less. This means during times of slow production the business’ payback is relative to their incoming merchant account deposits.

The application process isn’t as complicated as a traditional loan, which often makes the merchant cash advance approval process a faster option. Here are the typical steps a business needs to take:

  1. Apply for the advance
  2. Provide documentation
  3. Get Approved
  4. Set up your credit card processing
  5. Finalize the details
  6. Receive the funds

Why Omni Capital?

Omni Capital offers Merchant Cash Advance as one of our Short-Term Funding options. With Omni Capital, we make the process easy, so you can receive your cash and be able to pay it off as soon as possible. No collateral is necessary, and in many cases, we’ll be able to look past that less-than-perfect credit history. Give us a call today!