What is Merchant Cash Advance?

Merchant Cash Advance (often referred to as MCA) is when a business (merchant) receives upfront cash in exchange for its future receivables or sales. Merchant cash advances are not loans – they are sales of a portion of the merchant’s future receivables. In the US, merchant cash advances are not bound by state usury laws, which limit lenders from charging excessive interest rates.

With banks not lending to small businesses, MCA is a viable funding source for small businesses. Merchant cash advances generally cost more than traditional business loans offered by banks. However, cash advances are processed more quickly than a typical loan, making them more attractive to business owners. Repayment of a cash advance can also be based on a merchant’s sales volumes, which offers the merchant greater flexibility in managing its cash flow.

Below is an example of a merchant cash advance transaction:

When a restaurant averages $30,000 a month in sales and needs a short-term loan of $10,000, it may not qualify for a bank loan. Or perhaps the loan process takes a long time to complete. However, the restaurant can get a $10,000 merchant cash advance immediately, if he can show a history of generating $30,000 a month of sales from his business.

With MCA, the restaurant will receive the $10,000 cash infusion from a funder by agreeing to repay the advanced amount with interest. If the $10,000 cash infusion to the restaurant carries a 10% rate, this means the restaurant needs to repay $11,000. If the restaurant assigns 50% of its future sales (i.e., $500 a day) to the funding company, and maintains the same sales volume, the restaurant can repay the cash advance in less than a month.

There are four main players in the MCA Ecosystem (see below). We will have a follow up post to explain how merchant cash advance works later this month.