Advantages and Dangers of Merchant Cash Advances


When your business needs a cash infusion, Merchant Cash Advances (MCAs) can be an attractive option. Though they’re often lumped in with different types of lending, MCAs aren’t really a loan. Instead, a MCA is when a vendor buys future credit card sales from your business for a discount, and then receives a part of your business’s credit card sales until they’ve been paid the amount they purchased. While MCAs have some distinct benefits over more traditional financing options, they also carry risks. Below, we take a look at the biggest advantages and dangers of Merchant Cash Advances.

Advantage #1: Easy access

Merchant Cash Advances are a favorite option of businesses that either have bad credit or don’t qualify for traditional bank loans because they’re relatively easy to get. Getting a MCA is often just a matter of submitting an application online, which can be approved in minutes.

Advantage #2: Quick Funding

Need money right away? Not a problem. Merchant Cash Advances are a very fast option for financing, and borrowers can get funding within days. The approval and funding speed of MCAs is a distinct advantage over traditional loans, which can take week to process and approve.

With easy access and quick financing, Merchant Cash Advances can seem like the answer to a prayer. But don’t celebrate yet – MCAs have pitfalls for unwary borrowers that can leave your business deeper in the hole than you started.

Danger #1: Implied Interest Rates

One thing that Merchant Cash Advances don’t do is quote you an interest rate. Instead, you need to calculate the implied interest rate for your MCA, which can end up being significantly higher than any interest rate you would see at a bank or traditional finance institution. For example, if you sold $28,000 of credit card sales for $20,000 and were paying it back $100 a day, the implied interest rate would be 52%, incredibly high when compared to traditional interest rates. To find out what your implied interest rate is, you can use free online resources like The Kaplan Group’s Implied Interest Calculator.

Danger #2: Penalty Clauses

When you apply for a Merchant Cash Advance, pay attention to penalty clauses or liquidated damages. These act as insurance for the vendor in case you default or block your payments, but can mean that you end up paying thousands of dollars in penalties, collection fees or attorney fees. To avoid paying fees that can total more than your original MCA, read the liquidated damage clauses carefully to identify what actions will trigger penalties and what the dollar amount of those penalties would be.

Danger #3: Repayment Terms

You can repay Merchant Cash Advances with a fixed amount per day or with a percentage of your business’s daily income, and if you think that it doesn’t matter which option you pick, think again. If your business income fluctuates day by day, a fixed repayment can end up eating a large percent of your daily receivables. Percentage repayments give you more flexibility, particularly for businesses that depend on walk-in traffic or seasonal sales.

Despite their benefits, MCAs can turn into a financial trap for the unwary borrower. To make sure that MCAs are the right choice for you, review your options for both traditional and alternative financing. Once you’ve decided on an MCA, comparison shop to find a good interest rate and repayment terms that are in your best interest. If you’re careful and do your homework, Merchant Cash Advances can be a great way for your business to get access to the funding you need.

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About the Author

Megan Totka

Megan Totka is the Chief Editor for As a small business expert, Megan specializes in reporting the latest business news, helpful tips and reliable resources, as well as providing small business advice.

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