Merchant Cash Advances 101: How They Work + Benefits

merchant cash advances

One of the best financing options that offers quick access to capital for businesses looking to expand is a merchant cash advance. This type of financing offers a chance to keep stable capital funds, whether you’re going through variable cash flows or seasonal revenue variations.

We’ll break down all you need to know about merchant cash advances, including how they work and the benefits they offer. We’ll also explain how you can apply for a merchant cash advance at Capixa — a leading investment capital funding company.

Interested in a merchant cash advance?
Schedule a Consultation with Capixa

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a financing option that provides businesses with a sum of working capital upfront, which is then repaid by allocating a percentage of their monthly gross revenue sales to the lender.

It’s important to mention that merchant cash advances are not loans, as MCAs offer quick access to funds and feature flexible repayment options that are directly tied to the business’s sales volumes.

Lenders evaluate the applicant’s receipts and receivables to determine the ability to repay, ensuring that the financing method aligns with the business’s cash flow patterns.

What Is the Difference Between a Merchant Cash Advance and a Loan?

The main difference is mainly rooted in repayment structures and qualifying criteria. Traditional loans necessitate a fixed monthly repayment, regardless of your business’s financial performance.

On the other hand, MCAs tether repayments to your monthly gross revenue, creating a flexible repayment structure that scales with your business’s performance. Loans typically have more stringent qualification criteria, while MCAs are often more accessible — especially for businesses with limited credit history or sporadic revenue streams.

How Do Merchant Cash Advances Work?

A merchant cash advance (MCA) offers a swift and flexible financing option for businesses, providing a lump-sum capital influx in exchange for a percentage of monthly gross revenue.

Here’s a simplified breakdown of how it works:

  • Qualification and application: If you have a consistent volume of monthly gross revenue and have been in operation for a certain period (often a few months to a year) you are typically eligible.
  • Approval and agreement: The MCA provider evaluates your business’s average monthly gross revenue to determine the advance amount, payback amount, and holdback percentage.
  • Advance: Your business receives a lump sum of cash from the MCA provider to be used for various operational purposes, such as payroll or inventory.
  • Repayment: The MCA provider automatically collects a predetermined percentage (the holdback) of your monthly gross revenue. Repayments can be made via ACH on a monthly, bi-weekly, weekly, or daily payment frequency. This percentage is agreed upon during the approval process.
  • Cycle completion: Once the agreed-upon total repayment amount is fully paid, the MCA repayment cycle is complete.

Example: Your business receives an advance of $10,000 with a factor rate of 1.2. The total payback amount will be $12,000 ($10,000 x 1.2).

If the agreed holdback percentage is 10%, and your business has daily credit card sales of $2,000, the MCA provider would withhold $200 per day ($2,000 x 10%) until the $12,000 is repaid.

The application process for an MCA is often straightforward and digital, requiring less documentation than a traditional loan.
The application process for an MCA is often straightforward and digital, requiring less documentation than a traditional loan.

What Are Merchant Cash Advances Used For?

A merchant cash advance provides businesses with the immediate capital necessary to address various needs, such as managing cash flow, facilitating expansions, and navigating unforeseen expenses.

Some of the most common merchant cash advance use cases include:

Business Expansion

Initiating a business expansion can require significant financial support. Whether it involves extending operations, strengthening your team, or upgrading your offerings, an MCA delivers the immediate financial boost needed to fuel such growth.

Example: You’ve discovered a lucrative opportunity to open a second shop in a popular neighborhood. With an MCA, you can swiftly secure the funds you need to lease the new space, hire employees, and purchase essential equipment and inventory.

Inventory Management

Using an MCA, you can skillfully manage your inventory, ensuring you’re always prepared to meet customer demands, thereby boosting sales and strengthening customer relations. Additionally, it enables you to seize opportunities like bulk purchasing and strategic seasonal stocking.

Example: Your store is approaching the peak Christmas holiday season, and popular items are projected to fly off the shelves. An MCA allows you to bulk purchase these hot-ticket items in advance, so you can capture every possible sale.

Remodeling and Upgrades

An MCA allows you to carry out remodeling and upgrades without affecting your day-to-day cash flow.

Example: You notice that your bookstore has seen better days and needs a fresh look to attract more customers. An MCA can facilitate an immediate remodeling, allowing you to revitalize your space with inviting decor, comfy seating, and perhaps a cozy cafe corner.

Marketing and Advertising

An MCA allows you to not only maintain but also enhance your marketing activities, so your business can effectively communicate across platforms to grow your market presence and customer base.

Example: You’ve launched a new line of handmade skincare products online. With a merchant cash advance, you can fund a new marketing campaign, employing SEO, social media ads, and influencer collaborations, amplifying your brand’s visibility, driving traffic to your website, and elevating sales.

Supplier and Debt Payments

An MCA allows you to pay off outstanding debts and ensure timely payments to suppliers, protecting your supply chain and preserving your credit status, which in turn, supports steady and dependable business operations.

Example: Your craft brewery relies heavily on a consistent supply of quality hops and grains. If you fall behind on payments to key suppliers, an MCA can provide you with a quick influx of capital to settle outstanding debts, ensuring that supply chains remain intact, and your brewing operations continue seamlessly.

A merchant cash advance can help with tight deadlines, in scenarios when a business needs to capitalize on discounted inventory purchases or seize quick market opportunities
A merchant cash advance can help with tight deadlines, in scenarios when a business needs to capitalize on discounted inventory purchases or seize quick market opportunities.

Benefits of Merchant Cash Advance

Merchant cash advances are known for their swift and flexible financing opportunities, providing immediate capital.

The benefits of merchant cash advance loans include:

Quick Access to Capital

Merchant cash advances are often chosen because they allow you to access capital without the extensive paperwork, strict qualifications, or prolonged approval times associated with traditional financing methods.

This allows you to address your financial needs promptly, ensuring that liquidity issues do not hinder your operational continuity or growth opportunities.

Flexible Repayment Structure

One of the main attributes of MCA is that the repayment is typically a percentage of your average monthly gross revenue. This means that when your business experiences a surge in sales, you repay more and during slower periods, your repayment amount is lower.

This implies that your repayments are aligned with your business’s performance, mitigating the strain on your cash flow during lean periods. You’re also not bound on monthly payments compared to traditional loans, where you’ll have more room to navigate your business through financially turbulent times.

Minimal Restrictions on Use

Unlike various traditional financing options, an MCA does not limit your usage of the funds to specific purposes.

Whether it’s renovating your premises, investing in marketing campaigns, upgrading technology, or managing payroll during tight cash flow periods, you have complete freedom to invest in avenues that you identify as important for your business’s development and sustenance.

High Approval Rate

MCAs stand out by often embracing businesses that may have less-than-perfect credit scores or a shorter business history, which are typically significant barriers in traditional financing channels. A recent report found that around 85% of merchant cash advances are approved.

This means that even if you’ve encountered challenges in securing funds from conventional sources, an MCA provides an alternate path where your business is not only recognized but also has a higher likelihood of being approved for the capital it requires.

Secure Funding

Securing an MCA means that you’re entering a partnership where the financier is invested in your business. The capital you receive is not subject to unforeseen changes or fluctuations once approved.

This means that your financial planning can be executed with confidence, knowing that the agreed upon capital is secured and ready to be deployed as needed.

What To Consider Before Applying for a Merchant Cash Advance

While MCAs offer quick access to capital and a flexible repayment structure, they can also carry certain challenges.

Before applying for an MCA, consider:

  • Financial planning: MCAs provide quick access to capital, so consider how immediate funding can be strategically utilized for optimal business growth.
  • Cost analysis: Although MCAs offer a streamlined funding solution, it’s important to consider the associated costs, to make sure they align with your financial strategy.
  • Cash flow management: With repayments tied to daily transactions, thoughtful management of your cash flow is essential to accommodate the repayment amounts without impacting your operational finances.
  • Repayment structure: While higher revenues lead to quicker MCA repayments, consider how this structure fits into your broader financial landscape, to ensure sustainability and stability.

Lastly, check for merchant cash advance laws in your state, which are regulated by Uniform Commercial Code. These laws govern commercial transactions between businesses and lenders in the United States. In connection to merchant cash advances, the UCC may regulate aspects like the manner and scope of transactions, information disclosure, and repayment structures.

How To Apply For a Merchant Cash Advance

Applying for an MCA involves a relatively straightforward process:

Find A Provider

Applicants for any type of loan usually choose providers where they have an established relationship. Identifying an appropriate provider means comparing and researching MCA lenders based on factors that align with your business needs and repayment capabilities.

You’ll want to explore:

  • Reputation
  • Transparency
  • Flexible terms
  • Customer support
  • Speed of funding
  • Alignment and needs

Capixa stands out in the competitive field of MCA providers. As a leading investment capital funding company, we offer both merchant cash advances and small business loans.

With a strong reputation for customer service and transparency, we ensure the financing you need with terms that align with your operational goals and repayment capabilities.

Fill Out the Application

Complete the MCA provider’s application, which may be available online or through a paper form. Provide relevant business details, including ownership, type of business, and financial data.

You may also need to provide personal details, including contact information and possibly a social security number.

Submit Your Application and Wait for Approval

You need to prepare the appropriate documentation, including bank statements and credit card transaction records.

The merchant cash advance provider will review the application, primarily focusing on cash flow, to determine eligibility and the prospective advance amount.

This assessment phase is often fast, with decisions frequently conveyed within a matter of days or even hours.

Get Procurement of Funds

The merchant cash advance provider and you establish a mutual agreement concerning the advance amount, the repayment amount (utilizing a factor rate), and the retrieval rate, which denotes the percentage of daily revenue allotted for repayment.

Be strategic in utilizing the funds in areas that will generate returns, such as inventory purchase, marketing, or other revenue-generating activities.

Begin With Repayments

Repayment will typically begin immediately, with a set percentage of your daily or weekly revenue being redirected to the MCA provider.

Keep track of your repayments and manage your cash flow effectively to avoid financial strain.

Not sure which type of loan is right for you?
Schedule A Consultation

Set Up a Merchant Cash Advance Consultation With Capixa

Capixa is an investment capital funding company that takes a human approach to business lending, by understanding your needs to find the best merchant cash advance solution.

Our compassionate team of business builders, problem solvers, and clever investors help businesses get merchant cash advances quickly, securely, and on their own terms.

If you’re interested in applying for a merchant cash advance at Capixa:

  • Submit an application: Submit a free online application with no impact on your personal credit and no obligation to accept offers.
  • Set up a consultation: Connect with our dedicated account manager, who will contact you within an hour to understand your business, discuss documentation, and determine terms that meet your needs.
  • Wait for review: Sit tight as we review your application and send an offer within just 6-12 hours of application review.
  • Receive your funding: Get the funding you need for your business. Return whenever additional financing is needed to seize new growth opportunities. In addition to merchant cash advances, we also offer personalized small business loans for brands across industries.

Schedule a consultation with our team and find out how we can help.

Apply for a merchant cash advance.
Get Qualified