Merchant Cash Advance overview
What is a merchant cash advance?
A merchant cash advance (also known as an MCA) is a fast way to get your hands on a lump sum of money without needing any security.
It provides your business with a cash injection that you’ll later pay back in instalments based on a percentage of your sales.
MCA’s are unique in that the amount loaned (or ‘advanced’) is calculated and approved based on your business’ turnover. And while other types of loans will have ongoing repayments, MCA’s are paid off daily as a share of your card sales.
An MCA could suit you if you like the sound of speedy funding, no security and less documentation. And if your cash flow is steady (and regular) you’ll have a good chance of getting approved.
Since MCA’s have such a fast turnaround (and don’t require any documentation) they are well suited to fast-paced businesses that receive most of their payments by card.
Here’s an example of how an MCA works:
COVID-19 leaves Georgia, the owner of a boutique homeware store, unable to keep up with a spike in customer demand.
She’s not only seen an influx of new customers (looking to redecorate their homes during the pandemic) but delays from many of her usual suppliers.
She’s found a new local supplier to help her keep up with demand, but they charge double what Georgia usually pays.
She doesn’t have enough cash flow to support this new expense, so she decides to take out a merchant cash advance.
She quickly receives a lump sum of cash in her account (a total of $50,000 with a factor rate of 1.25%) to pay her new supplier and fulfil orders. Including interest, she owes $62,500 in total and will pay her loan back with 10% of her daily EFTPOS sales.
Georgia generates a daily average of $1000 through card sales, so this equates to paying back $100 of her merchant cash advance per day.
Based on these figures, it should take her just under 18 months to repay her MCA.
If her card sales increase, she will pay it off sooner but regardless of how quickly she pays it off, the rate does not change and she will always owe $62,500. This, along with the flexible repayment schedule, gives Georgia peace of mind.
Pros and cons of a merchant cash advance
Pros: ✓ No security needed ✓ Automatic repayments mean one less thing to think about ✓ Quickly access cash (in as little as 24 hours) ✓ Steady your cash flow ✓ Fast, simple application ✓ Having a bad credit score isn’t a dealbreaker ✓ Smaller loan amounts are available ✓ No impact to your credit score ✓ Flexible repayments
Cons: X Higher interest rate than bank loan X Only suitable for those who receive most sales by card X Only suitable for short term solutions
Benefits of a merchant cash advance
Compared to other types of business finance, the approval process for an MCA is usually much simpler. Lenders require fewer documents and less weight is placed on your credit score. Why? Given the nature of MCA’s (where payments are made daily), lenders are more concerned with a business’ cash flow than the owner’s personal credit history.
✓ Usually no need for security Instead, your MCA is secured by future card sales. If you miss a payment—or make a late payment—your assets are safe. You won’t face any personal liability either. However, if you’re a guarantee and you miss multiple repayments, your lender might consider seeking repayment from you personally, and they are entitled to do so.
✓ Repayments are made automatically Repayments on your MCA are made automatically based on your credit card transactions. This means you don’t have to manually make repayments or worry about any late fees, as long as your business keeps generating sales.
✓ Gain access to cash quickly MCA’s can often be financed within one to two working days. Unlike bank loans that can take weeks or months to finalise, an MCA is simple to apply for, process and settle. In some cases, our lending experts can organise funding for you in as little as 24 hours.
✓ Keep your cash flow consistent MCA repayments are based on a percentage of your monthly sales, so if you have a particularly slow month, you’ll pay back less. On the flipside, you’ll pay back more during busier months when you’re pumping out sales. Essentially, your repayments align with your cash flow which helps to keep it steady.
✓ Simple application process Compared to regular bank loans, MCA’s are simple to apply for. They require little documentation, are largely completed online and paperwork is kept to a minimum. In addition, they are processed faster than small business loans.
✓ Looser approval criteria
Don’t qualify for a traditional business loan? You might have more luck with an MCA as approval criteria is easier to meet. Your credit score isn’t the be-all-and-end-all—lenders are instead focused on your cash flow.
✓ Borrow less
Finding lenders who offer smaller loan amounts can prove a challenge. Rather than taking on more debt than you need, an MCA solves this problem by allowing SMEs to borrow as little as $5,000 cash.
✓ You decide where the money goes
Unlike other business loans, you’re free to spend money as you please without having to outline your plans to a lender. It’s all up to you.
✓ No fixed payments or deadlines Seeing as MCA repayments are based entirely on your cash flow, you don’t have to worry about fixed repayments, deadlines, rates or unexpected late fees. The amount you pay back never changes (which helps you plan ahead) but, at the same time, payments are made automatically and guided by your business’ performance.
Drawbacks of a merchant cash advance
Lenders are taking on more risk when they offer an MCA (as opposed to a regular loan) as they’re depending on your future sales, and they can’t know for sure how your business will perform.
To justify this additional risk, MCA’s tend to be more expensive than regular loans, but the benefits often outweigh this. Just make sure you know the annual percentage rate (APR) as this will help you compare MCA’s to other loan products.
While an advance can free up cash flow in the short term, keep in mind your lender will be taking a percentage of your daily sales on an ongoing basis, which, in turn, will also affect your cash flow. Will you have enough money to cover running costs and effectively run your business in the coming months? It’s worth double checking before you go ahead and apply.
Here are a few points you’ll need to consider before deciding whether an MCA is right for you:
X They cost more than other business loans As mentioned, the price you pay for an MCA reflects the risk your lender is taking on. But, for the right business, MCA’s come with so many benefits that simply outweigh the price.
X Only suitable for those with high turnover of card sales MCA’s best suit businesses who receive a high volume of credit and debit card payments, such as retail stores. If the majority of your payments are made in cash, it would take too long to pay off your MCA.
X Short-term solution only
If you’re looking for a short-term solution to free up cash flow for business expenses, an MCA could be a great fit for you. However, more traditional types of finance like business term loans are best for longer-term financing. That’s because MCA terms are usually short—up to a year for most lenders.
X There could be restrictions
Make sure you read the fine print, as some lenders might have rules around making fundamental changes to the running of your business. These could include switching credit card companies, offering cash discounts, or changing your hours of operation.
Why take out a merchant cash advance?
Merchant cash advances can suit a wide range of business needs, and are one of the fastest ways to secure cash for your business (along with unsecured business loans).
No need to worry if your credit score isn’t up to scratch either—if your business has steady sales then a merchant cash advance could be a fantastic fit for your business. Here are a few ways you can use a merchant cash advance to your advantage:
- Pay urgent bills
- Embrace new marketing opportunities
- Fulfil seasonal needs
- Purchase equipment
- Hire new employees
- Cover expenses
- Renovate or expand
- Purchase stock
Eligibility and application
Applying for a merchant cash advance is not the long-winded experience you might imagine. Unlike regular loans, lenders don’t ask for much information and are less concerned with your personal credit score given the MCA is effectively backed by your sales.
Your cash inflow is what really matters. Lenders want to see a stable business with a large volume of sales and predictable, steady cash flow.
Should you apply?
If your business has a history of credit card transactions and makes the majority of sales by card, a merchant cash advance is worth looking into.
It’s ideal for those who want their repayments to fluctuate with the sales of their business (while avoiding steep payments). Applying for an MCA is fast and simple, making it a solution for immediate cash needs.
Businesses within hospitality and retail are likely to benefit from an MCA more than others, and we most often recommend MCA’s to business owners within these industries.
How to apply for a merchant cash advance
Apply online: Use our free online loan finder to find and apply for a merchant cash advance.
Give us a ring: Call 1300 780 568 for a no-obligation chat with a lending expert.
Chat with us: Live chat with one of our lending experts.
Avoid being declined
Our lending experts are able to give you an idea of whether you’ll qualify (and get you pre-approved) based on your unique situation, so, to avoid being declined, check your eligibility for an MCA.
We work with over 80 lenders so we can help you find a solution that will work for you and your business needs.
Some of the reasons you might be declined include:
- Lack of credit card payments
- Outstanding debt
- Having a business that’s considered ‘too young’
- Being in a weakening industry
- Inconsistent revenue
Frequently asked questions
What fees are associated with a merchant cash advance? Lenders charge a “cost of capital” fee, and this usually sits somewhere between 1.1x to 1.4x of the amount that was advanced. So, if you borrowed $100k, your total repayments might be between $110k to $140k.
Note: the total you’ll pay in fees depends on the amount you want advanced, the term length and the total holdback amount (i.e. the % proportion of daily sales that are going towards paying off the advance).
Some lenders might also charge additional fees, like a monthly account keeping fee, assessment fee, processing fee, or establishment fee.
To find out exactly what you’d be paying (fees and all) for your requested merchant cash advance, give us a call on 1300 780 568 or use our online loan finder.
To find out what your total fees would be for your requested merchant cash advance, give us a call on 1300 780 568 or use our loan wizard.
How quickly can I get a merchant cash advance? Speed to funding depends on your unique situation but your MCA can be funded in as little as 24 hours through Valiant. Factors that influence how fast you’ll get funded include: your lender, your cash flow, the terms you request, and how quickly you give us (or your lender) required documentation.
How can I get a merchant cash advance online? The application process for a merchant cash advance is simple and fast, meaning a majority of the application can be done online. You can start the online application process by using our free online loan finder and submitting your details. From there, one of our lending experts will get in touch to process your application and collect any required documentation.
Can I get a merchant cash advance with no credit check? Because merchant cash advances are approved based on your sales volume and the overall health of your business, your credit score holds less weight. For this reason, you might find that some lenders are willing to offer funding without a credit check (but if you have a bad credit score, rates will likely be higher).
Can I get a merchant cash advance if I have bad credit? Depending on the lender you choose, you may qualify for a merchant cash advance even if you have a poor credit score. The lender will take into account the overall health of your business and cash flow to determine whether you’re eligible, and, if you’re successful, will typically charge higher fees to mitigate additional risk.