At one point or another, just about every business will need a quick infusion of funding. A merchant cash advance can offer just that; it provides short-term funding offered in one lump sum to a business in exchange for a portion of the business' future credit card sales. Though the cost of capital with MCA funding is substantially higher than it would be for a traditional small business loan.

This type of small business financing can be classified as "factoring" or "credit card receivables funding." MCA funding is not a traditional loan; there are no personal guarantees required. Lenders will look to work with companies that have been in business for over a year with at least $50,000 in annual revenue.

There are several advantages of merchant cash advance financing. 


The most obvious advantage is that MCA funding provides capital quickly when a business owner is caught in a cash crunch, has been hit with an unanticipated bill or needs money in order to complete a deal that might go away if not acted upon immediately. Large sums of money can be obtained in a short period of time - often in just a day or two. Cash advances can be as small as $5,000 and as large as $200,000. Very little paperwork is involved; much of the process is handled online.

Repayment is tied to the success of the business.

The advance is repaid based on a company's credit card receipts. If a business has had a slow day, the repayment amount for that day is reduced. MCA funders can take 20 percent of credit card receipts on a daily basis depending on the success of the business rather than to the calendar. 

Borrowers can obtain financing even if they have bad credit.

For borrowers who have a poor credit history, merchant cash advance companies put less emphasis on credit scores. Instead, they make their decisions based on current operations and sales projections. For companies that may be trying to overcome some initial financial struggles but have a good prognosis for future success, this type of funding could be a good solution.

High cost of capital

Things that are quick and easy often come at a high price. Such is the case with MCA funding. What can get borrowers in trouble is that a factor rate of 1.17--which looks like a loan at 17 percent interest--actually costs much more than that. 

For instance, if a company has taken a $50,000 advance, the repayment amount will be $58,500 (the amount equal to $50,000 times 1.17). The effective annual percentage rate (APR) is much greater, sometimes approaching triple digit percentages depending on the factor amount and the amount of time needed to repay the loan. A typical repayment time can be as short as four months to  to over one year. Repayment in this manner can hurt monthly cash flow, which is the lifeblood of any small business. 

For companies that have good credit, a line of credit can be easier to obtain and may take only a few days to process. Traditional bank loans and SBA loans can be obtained at much lower interest rates, but it may take weeks to go through the application process. However, if a company has a credit score below 600, obtaining a more traditional form of funding simply may not happen.

The bottom line is that a merchant cash advance is the costliest form of funding. It can also start a vicious cycle of borrowing because it hurts cash flow, resulting in the need to get additional lump sums of money that are again paid off at high interest rates. Any company that is constantly using MCA funding to stay afloat probably does not have a good long-term financial prognosis.

If a business owner can obtain a line of credit, a traditional small business loan from a bank or an SBA loan, the cost will be much lower. The key is whether the borrower has good enough credit to secure funding from a more traditional source. One thing to keep in mind is that lower cost money (e.g., bank loans) take time to process. If a company is experiencing a financial emergency situation, time could be a luxury that the borrower does not have.