What you should know about merchant cash advances | finder.com

What is a merchant cash advance?

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This flexible funding was built for retailers. But is it right for your business?

Without time-consuming credit checks and rigid repayment plans, merchant cash advance is perfectly suited to the fast-paced, unpredictable world of retail. Similar to a business loan, but with several important differences, a merchant cash advance may suit any company that receives the majority of its payments by card.

What is a merchant cash advance?

A merchant cash advance is a type of business financing for companies that have a large amount of credit card sales. Your business gets access to and repays it repay plus a fixed fee with a percentage of your daily or weekly sales.

Merchant cash advances are designed to provide a temporary cashflow solution to business owners who might not be able to qualify for other types of financing. It’s typically fast, but it can one of the more expensive business financing options out there.

Compare 3 merchant cash advance companies

Thinking of getting a merchant cash advance? Let’s take a look at how these three lenders work.

Company Advance amount Cost Terms Eligibility
Fora Financial $5,000 to $500,000 Factor rate of typically 1.1 to 1.3 up to 15 months Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies.
Lendr $10,000 to $500,000 15%–25% APR 4 to 13 months Business must be 12+ months old, have monthly revenue of $10,000+ and not be located in Alaska or Hawaii. Minimum borrower credit score of 520+.
Rapid Advance $5,000 to $1,000,000 Varies Up to 1.50 years For a merchant cash advance you must be in business for at least a year and make at least $5,000 a month in credit card revenue. Read review

Fora Financial

Fora Financial is a direct lender that provides short-term business loans and merchant cash advances. Your business can apply with a quick online application. While more expensive than other types of business financing, Fora Financial’s typical factor rates are relatively low. However, it’s turnaround time of up to 72 hours is slightly longer than what you might find elsewhere.

Read our review of Fora Financial

Lendr

Lendr is another direct lender that specializes in merchant cash advances. The total loan cost, comes out to around 15%–25%, including the factor fee. You don’t need to have good credit to qualify — or even fair credit for that matter. But your business must be around for at least one year. In addition to merchant cash advances, Lendr also offers working capital loans, equipment loans and more.

Read our review of Lendr

Rapid Advance

RapidAdvance is another online direct lender that specializes in short-term business financing, including merchant cash advances. Businesses can typically qualify for between 85% and 250% of their monthly credit card sales and all credit types are accepted. However, RapidAdvance isn’t forthcoming about its rates as some other lenders, so you need to request a quote before you can compare it with other lenders.

How does a merchant cash advance work?

A merchant cash advance works a lot like a short-term business loan. You apply for a one-time sum, typically based on your monthly credit card sales. Your business then pays this back plus a fee that your lender determines by something called a factor rate or factor fee.

Instead of making fixed installment payments, your business then pays off the loan with a percentage of each credit card transaction, sometimes called the holdback. Holdbacks typically range from 10% to 20% of each sale. So how long it takes to pay back your loan is determined by your holdback rate and your sales — not a set loan term.

Some companies also have a minimum monthly payment that your business must make even if it doesn’t have any sales. Many have a maximum amount of time your business can take to repay a merchant cash advance, typically around one year.

Factor rates explained

A factor rate is a number above 1 that your lender uses to come up with your total loan cost. It does this by multiplying your factor rate by your loan amount. They typically range from 1.1 to 1.5, though some lender charge factor rates of 3 or even higher.

Let’s take a look at an example. Say your business qualifies for a $10,000 merchant cash advance from a lender at a factor rate of 1.15. Here’s how it breaks down:

  • How much your business receives: $10,000
  • How much your business owes: $11,500

merchant cash advance

Is my business eligible for a merchant cash advance?

Merchant cash advances are ideal for retailers and e-commerce businesses. But any business with a high volume of credit card sales might be able to qualify.

This can even mean young businesses and owners with poor credit. Some merchant cash advance companies are even willing to work with businesses that have been around for as little as three months. However, you can’t use a merchant cash advance to fund your startup — qualification typically depends on your business’s credit card sales record.

What are the benefits of a merchant cash advance?

  • It’s quick and efficient. Unlike business loans that can take months to be approved, a merchant cash advance can provide you with much-needed funds in a couple of weeks or less.
  • Collateral isn’t required. You don’t need to provide any business or personal assets to be approved in order to qualify for a merchant cash advance.
  • There’s no credit check. While this isn’t guaranteed, advances for smaller amounts can regularly be obtained with a less-than-perfect credit score.
  • Repayments are based on sales. The amount you repay changes according to your earnings. This ensures small companies with changing levels of income don’t get caught out with fixed repayments.

Are there any drawbacks?

  • It’s expensive. With terms typically hovering around one year, even the least expensive merchant cash advances can cost the equivalent of a triple-digit APR — high compared to other types of business financing.
  • You can’t save by prepaying. The factor rate applies no matter how long your business takes to pay back the advance, meaning that paying early won’t save you anything.
  • There’s a lack of regulation. Merchant cash advances aren’t regulated by federal banking laws, so regulations vary by state to state.
  • It’s not a long-term solution. Merchant cash advance plans usually last no longer than 12 months. Along with the cost, this means they are unlikely to provide positive results other than for a short period.
  • It can be risky. While past sales information should be an accurate indicator of future sales, industries such as retail and hospitality can be fickle. If your business can no longer pay off the advance, you will need to find the repayment money elsewhere.

Compare more business loans from top lenders

Rates last updated October 20th, 2018
Unfortunately, none of the business loan providers currently offer loans for these criteria.
Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
LoanBuilder, A PayPal Service Business Loans
Customizable loans with no origination fee for business owners in a hurry.
$5,000
$500,000
Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+.
Credibly Business Loans
Funding to cover business expenses with daily or weekly repayments.
$5,000
$250,000
At least 6 months in business, average $10,000 in monthly deposits.
Lendio Business Loan Marketplace
Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
$500
$5,000,000
Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
LendingClub Business Loans
With loan terms that vary from 1 to 5 years, enjoy fixed monthly payments and no prepayment penalties through this award-winning lender.
$5,000
$300,000
2+ years in business; $50,000+ in yearly sales; No bankruptcies or tax liens; At least 20% ownership of your business; Fair or better personal credit
OnDeck Small Business Loans
A leading online business lender offering flexible financing at competitive fixed rates.
$5,000
$500,000
Must have been in business for at least one year with annual revenue of $100K+. Must have a personal credit score of 500+.
Lending Express Business Loan Marketplace
$5,000
$500,000
At least 3 months in business and $10,000+ in monthly revenue. Your business might also qualify if it's been in business at least 6 months with $3,000+ in monthly revenue.
Fora Financial Business Loans
No minimum credit score requirement and early repayment discounts for qualifying borrowers.
$5,000
$500,000
Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies.
LendingTree Business Loans
Multiple business financing options in one place including: small business loans, lines of credit, SBA loans, equipment financing and more.
Varies by lender and type of financing
Varies by lender and type of financing
Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.

Compare up to 4 providers

Anything else to watch out for?

With no federal regulation, your lender has a lot more leeway when it comes to how much it can charge you and how it discloses its fees. Watch out for complicated contracts that are difficult to follow — your lender might be trying to hide something. If possible, take some time to review your contract and ask an expert if there’s anything that isn’t clear.

The lack of federal regulation also means that lenders need to meet state requirements to legally offer financing. Double check to make sure your lender is able to lend in your area before applying for a loan.

How does the application work?

The application is often simple, meaning that it often has a faster turnaround time than other types of business financing. Lenders typically only have a monthly or annual sales requirement and accept all credit types. Some might not even run a credit check for smaller advances.

Often, you can apply online by filling out a quick application. Once your application has been approved, some lenders might ask you to open a separate bank account known as a “pass through” account. You can then use this for processing any transactions and the lender can collect their share. Others might simply ask for access to your business’s bank or Paypal account to withdraw the repayments.

How can I get out of a merchant cash advance?

Sometimes merchant cash advance repayments can slow your business down, especially if you don’t have the sales you expected. In that case, you might want to look into refinancing. There are two main ways to refinance a merchant cash advance: Refinance with a traditional business loan or refinancing with another merchant cash advance.

Both can be expensive options: With a term loan, your business pays interest and fees on top of the fees already rolled into your merchant cash advance. With another merchant cash can often means doubling up on the factor rate. However, term loans typically come with monthly repayments which are often easier to manage. It can also your business on a solid path to pay off the debt.

Merchant cash advance alternatives

Don’t think a merchant cash advance is right for your business? Consider these alternatives instead.

  • Cash flow loans. A cash flow loan, also often referred to as an ACH loan or revenue-based financing, works like a merchant cash advance but is based on your business’s daily bank deposits rather than credit card sales.
  • Asset-based financing. Can’t qualify for an unsecured business loan? Backing your loan with your business and personal assets can help you get access to more funding, typically 80% or 90% of your assets’s value.
  • Alternative business loans. Some lenders offers short-term financing options that work a lot like a merchant cash advance. But daily repayments are fixed instead of a percentage of your deposits or credit card sales.
  • Invoice factoring. Need a cashflow fix but work with other businesses or government agencies? Get an advance on your unpaid invoices by selling them to a factoring company at a discount. There are several different types of invoice factoring.
  • Invoice financing. Use your business’s unpaid invoices to back short-term business loan and repay it as your customers pay you.
  • Short-term business loans. If your business needs money up front and doesn’t rely on customer sales, many alternative lenders offer short-term loans that work a lot like merchant cash advances but come with repayments in fixed installments.

Bottom line

Merchant cash advances might be an easy way to get cash when your business is facing a seasonal dip in sales. It’s also one of the few options that doesn’t require a credit check. But the high cost and lack of regulation might make you want to consider other options first. You can get started by checking out our business loans guide.

Frequently asked questions about merchant cash advances

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