Guide to merchant cash advances

Need to borrow money for your small business? Find out if a merchant cash advance is the right fit for you.

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Merchant cash advances (MCAs) can be a quick and easy way to get your hands on fast cash for your business. These advances come with very flexible repayment plans, but they can be much more expensive than business loans due to higher rates and fees. Learn more about how MCAs work, including how your business can benefit from this type of cash advance and what you need to do to qualify.

How does a merchant cash advance work?

A merchant cash advance lets you borrow money in exchange for a percentage of your daily credit card and debit sales. Lenders determine the amount you can borrow by looking at your historical sales data. This means your lender will look at your receipts from previous months to determine how much they want to lend you – with a hefty “cost of doing business” fee added on top of that amount.

Although your lender sets the amount of money you can borrow, the amount you’ll pay back month to month will vary based on your sales. For example, let’s say you borrow $100,000 and agree to pay it back with 20% of your card sales. If you earn $50,000 in card sales your first month, you’ll automatically pay $10,000 onto your MCA. If you earn $75,000 in your next month, you’ll pay $15,000 onto your debt. This will continue until you have paid your advance in full.

How is a merchant cash advance different from a business loan?

Merchant cash advances are different from business loans in a number of ways. Unlike business loans, MCAs are guaranteed by your credit card sales so you don’t need to put up an asset to secure them. They are also easier to qualify for and can be approved in one to three days, which is much faster than a typical business loan.

Despite their advantages, MCAs typically come with much higher rates and fees. You may end up paying hundreds or thousands more in cash advance fees over the course of your term. This is because rates and fees aren’t regulated like they are for traditional business loans.

Advantages and disadvantages of merchant cash advance

Advantages

  • Quick approval. Typical turnaround is two to three days, but you may be able to get same-day funding for smaller amounts.
  • Accepts bad credit. Having a low credit score typically isn’t a problem since the money is paid back as a percentage of credit card sales.
  • No collateral required. You won’t need to secure the advance with assets because it’s covered by your future cash flow.
  • High borrowing limits. You may be able to borrow anything from a few thousand dollars to over one million, depending on your lender.
  • Flexible payment amounts. Payments are based on a flat percentage of your credit card sales, so the amount you pay will be lower when you sell less.
  • Easy application. You can complete the application online and easily upload any supporting documentation that’s required.

Disadvantages

  • Higher rates. You’ll often end up paying higher rates and fees than you would with a traditional loan.
  • Less cash flow. A percentage of the money you make will be redirected to pay off your cash advance.
  • Not regulated. Fees and rates aren’t regulated, so lenders can get away with charging as much as they want.

Can my business qualify for a merchant cash advance?

There are a few things that lenders might look for to determine whether you can qualify for a merchant cash advance.

  • Business status. Your lender will want to make sure that your business is licensed to operate in Canada.
  • Length of operations. Some lenders will work with businesses that are only a couple of months old while others may want you to be at least a year old.
  • Monthly revenues. You may be required to make sales above a certain threshold each month to qualify.
  • Proof of transactions. Many lenders will want you to show that you’ve been processing credit card payments for at least a couple of months before they’ll approve you.
  • Amount of advance. The amount you’re looking to borrow will determine your eligibility to apply with certain lenders.

What are my alternative options?

If you don’t think you’ll qualify for a merchant cash advance, you have other options.

  • Business loan. These loans are specifically designed to cover business expenses but sometimes require a good credit score to apply.
  • Bad credit loan. You may be able to apply for a bad credit loan even if your credit score is low. You’ll need to supply documentation about your debt and income though.
  • Secured loan. It could be possible to get approved for a loan quickly if you secure your payments against the title of your vehicle or the equity in your home.
  • Guarantor loan. It’s likely that you’ll be approved much faster if you can ask family or friends with good credit to cosign your loan.
  • Low-interest credit card. You may be able to pay for business expenses on a low-interest credit card (which you can pay off when your sales pick up).
  • Line of credit. You can look into a line of credit for your business to make sure you have cash on hand in case of an emergency.

Bottom line

If you need to get your hands on quick cash to fund your business expenses, an MCA might be a suitable option. This type of advance takes a percentage of the credit card sales from your business to pay back the loan. Learn more about what you’ll need to qualify for an MCA as well as what things you should consider before you take the plunge.

Frequently asked questions

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