Is an MCA Advance Right for Your Business? Pros, Cons, and Red Flags

When you look to start a business, there are things that will keep you bothered, and the most important one is the right funding for your small business. Traditional small business loans generally have strict requirements, which may not allow a lot of entrepreneurs to qualify, so they look for alternative financing options.

One of the options that has become popular in the recent years is the MCA advance known as merchant cash advance.

Although MCA provides small business owners with quick access to working capital, it still has some pros and cons. In this article, you will get to know about all those pros and cons, how they work, impact your business, and their viable alternatives.

Understanding cash advance for business

A cash advance lets you borrow irrespective of your future income. It means the lender will give you the cash in advance before you start generating revenue. So, you basically sell your future revenue in exchange for the money you will receive today, which makes a cash advance different from a usual type of financing. Various lenders offer cash advances, including banks, credit unions, online, and alternative lenders.

An MCA advance, or merchant cash advance, works similarly to a payday loan, providing quick access to cash based on future earnings. Instead of waiting for your next paycheck, the lender typically withdraws the borrowed amount and fees directly from your checking account on your next deposit date. In some cases, borrowers may be required to write a check covering the full repayment amount upfront, which the lender will then cash once the funds are available.

The loan fees for these loans are generally on the higher side and can also fall into significant debt. Cash advance loans are at times seen as predatory. Although they can come up with vital cash flow in case you don’t own a credit card or are stuck with credit card payments. Therefore, a special financing option is available as an MCA advance to support your business needs and help you cash flow.

Understanding MCA

MCA advance is a source of short-term funding for situations where you are not able to obtain financing from a bank or any other alternative. You borrow these advances against any future credit card sales, in which most of them are repaid, along with the associated fees, within the span of 6 to 12 months.

The eligibility to get an MCA, your business should have a daily credit card transaction along with proof of at least four months of credit card sales. There are multiple MCA companies that would want to know your monthly credit card sale to be around $2,500 and $5,000, which will be based on your advanced amount. This practice helps the lenders to ensure that you can repay the advance you took.

Pros of advance cash

Below are some of the advantages of the MCA advance.

Easy to qualify for

One of the key benefits of an MCA advance is how simple and fast the application process can be. Unlike traditional loans that involve lengthy paperwork, credit checks, and collateral requirements, an MCA is typically based on your business’s daily credit card sales. This makes it a practical option for business owners with poor credit or limited assets. Similarly, a payroll advance loan provides short-term relief for individuals by allowing early access to earned wages without the hurdles of traditional borrowing.

Fast funding

Speed is also a major factor in merchant cash advance, also known as MCA advance. The application process is straightforward and can be disbursed once approved quickly. This turnaround is perfect for businesses that face challenges of immediate cash flow or have any unexpected expenses.

No collateral

MCA advance doesn't ask you to submit any type of collateral like traditional bank. This in a way reduces the risk of businesses for losing any valuable asset during the times the company struggles with the repayment schedule of the advance amount.

Payments are based on your sales

The repayment of an MCA is often tied directly to the everyday credit card sales of the business. This will make the fluctuation of payment with sales volume, making it easier for businesses to manage in the off-season. Instead of a fixed amount of monthly payment, the repayment amount will be adjusted as per the revenue, which will also provide some flexibility in the management of cash flow. ,

Cons of Merchant Cash Advances

Below are some of the disadvantages of the MCA advance.

Expensive cost

One major drawback of an MCA advance is its high cost. Instead of traditional interest rates, MCAs usually use between 1.2 and 1.5 factor rates. That means for every $1,000 borrowed, a business might repay $1,200 to $1,500. When you break down the repayment structure and annualize the costs, the effective APR can soar into triple digits. This makes MCAs one of the most expensive funding options, even compared to cash advance loans online, which are already known for steep fees.

Hurts cash flow

While repayment based on sales is flexible, it can also be a drawback. When sales are low, daily or weekly deductions can drain the business's working capital, making it difficult to cover other necessary expenses. This can also lead to dependency on MCAs, where businesses repeatedly require advances to continue operating.

Less regulated industry

The operation of MCA advance happens in a gray area, which means the oversight is less than compared to a traditional business loan. Since there is a lack of regulation, it can lead in predatory practices, hidden fees, and reduced transparency of terms and conditions. Businesses also should understand the terms and conditions of these agreements and should reach out to reputable merchant cash advance providers.

Not a permanent solution

MCAs are usually designed as a short-term solution when you immediately need cash-flow. They may also not be suitable when you need financing for a longer period of time, and can also be costly. Businesses that rely on MCA advances for their funding can also fall into a debt cycle and struggle with the repayment cost.

How does a merchant cash advance work?

An MCA advance is generally structured around a business's future credit card sales. Below is a step-by-step breakdown of how this process works:

Application: When a business applies for an MCA by providing basic information related to its operations and everyday sales history, it gets evaluated by the MCA provider. The criteria for application are the daily credit receipt of your business.

Approval: If you get approved by the provider, they offer you a lump sum of cash, usually a percentage of the business's average credit card sales monthly.

Agreement: The business and the MCA provider come on the same page on the factor rate and the daily credit card sales percentage, which will be withheld for repayment.

Funding: The agreed amount is then deposited as a payment amount in the business’s bank account within a few days after the approval.

Repayment: With the MCA advance, there are no fixed payments. Rather, the provider deducts the agreed-upon everyday credit card sales percentage till the time advance and fees are repaid entirely. This process continues until the time the repayment amount is calculated with the help of the factor rate and is met.

Does a merchant cash advance impact your credit?

Merchant cash advances typically don’t impact a business’s credit score because they aren’t classified as traditional loans and usually aren’t reported to credit bureaus. Instead, the advance is repaid through a percentage of future sales, often with daily or weekly deductions.

However, if a business defaults, the provider may pursue legal action, which can harm the business’s credit standing. The aggressive repayment terms can strain cash flow, making it harder to cover other obligations and potentially leading to credit issues, especially for businesses already struggling with bad credit.

Final thoughts

While an MCA advance can offer fast and flexible access to working capital, it’s essential to weigh the pros and cons carefully before proceeding. This funding option's high costs, unregulated nature, and short-term design may not suit every business.

Before signing an MCA agreement, business owners should fully understand the repayment structure, evaluate the impact on cash flow, and compare alternative financing options. By doing so, they can make an informed decision that supports long-term growth rather than short-term relief. Always choose reputable providers and read all terms thoroughly before committing.

FAQs about MCA advance

What are the cons of merchant cash advances?

The fees that are paid by the MCAs are not considered to be interest rates. If it is compared, the rate paid, however, for an MCA advance is significantly higher than a bank loan. The equivalent annual percentage rate (APR) for an MCA is usually around 200% of the advance, resulting in costly loan payments.

Is it a good idea to get a cash advance?

Taking out a cash advance can seem like a good idea as it will ease your cash flow, but it can also lead to debt, that to in a short span of time. Therefore, it is better to avoid cash advances altogether and opt for alternative options with better terms.

Are merchant cash advances predatory?

The MCA advance industry remains largely unregulated, which opens the door to potentially predatory lending practices. This makes it critical for business owners to thoroughly review all terms and conditions, especially personal guarantees, before signing an agreement. Seeking legal advice can help avoid costly mistakes and protect your business.

Does MCA affect credit score?

An MCA advance usually does not directly harm your personal or business credit. Unlike traditional loans or credit lines, most MCA providers do not report credit bureaus.

Can you pay back a cash advance right away?

There is no deadline to repay the MCA advance, unlike other types of loans. But you should make sure that you are making the minimum monthly payment on your credit card. Since a cash advance has a high interest rate, you should make sure that you are repaying the money at the earliest.

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