Merchant Cash Advance

With an MCA you’ll be given a lump sum payment up front in exchange for a percentage of your future credit card sales. The provider is essentially buying a portion of your future sales. There’s typically not a set repayment schedule because payments are percentage based. The agreed upon percentage, called a holdback, will be drawn from your account to repay the advance — meaning your sales will determine how fast or slow the advance is repaid.

Because an MCA is not a loan, it won’t affect your credit score. Your timely payments won’t be reported, but missed payments won’t be either. The terms for defaulting will be outlined in your contract with the provider. Be sure to review before signing.

A merchant cash advance isn’t a small business loan. It’s a cash advance based on the credit card sales deposited into your business’s bank account. Essentially, you get a percentage of your future earnings up front. In return, you sign over a portion of future income to the lender.

Because a merchant cash advance is not a loan and providers do not report your payment history to the business credit bureaus, it does not help build or strengthen your business credit score or profile.

When you obtain a term loan you receive a lump sum of cash up front to finance your business. You repay the loan over a set period of time in small equal increments. Many small business owners find a short-term business loan to be a good alternative.

A short-term loan from OnDeck, for example, could have a term as short as a few months and offer terms more familiar to a small business borrower. Depending upon the nature of the loan, periodic payments will be either daily or weekly, allowing the small business owner to spread the burden of debt throughout the month, rather than requiring one larger payment at the end of the month.

Others are able to leverage a small business line of credit. A line of credit is a form of revolving credit. Much like a credit card, a credit limit will be set and you will have access to a well of funds that you can draw from. As you repay, the funds will become available again. A line of credit can help you manage your cash flow and is good to have on hand to take advantage of opportunities as they arise.

OnDeck also reports your credit history to business credit bureaus, which may help strengthen your business credit score with on-time payments.

A term loan or line of credit from OnDeck can help you reach your goals. With fast funding and a stellar team of loan advisors, we can help your business thrive. Apply now and you could get a decision within minutes.

MCA providers look at daily credit card receipts to determine if you can pay back the advance in a timely manner. All lenders — including merchant cash advance providers — typically require you to meet some minimum requirements. These providers have different qualification standards than credit lenders. As a result, rates on an MCA can be much higher. It’s critical you understand the terms you’re being offered so you can make an informed decision about whether or not a merchant cash advance makes sense.

The holdback amount is the percentage of daily credit card sales applied to your advance. The holdback percentage (somewhere between 10% and 20% is typical) is usually fixed until the advance is completely repaid.

Because repayment is based on a percentage of the balance in the merchant account, the higher your sales, the faster you’ll repay the advance. If your transactions are lower than expected the payment will be less, but it will take longer to repay the advance. In other words, the payback is typically relative to the incoming credit card receipts.

There’s a difference between the interest rate you’ll pay and your holdback amount. Your holdback rate is the percentage of sales applied to the total amount of your advance. But the total cost of your advance will be directly impacted by your interest rate.

With a merchant cash advance, interest rates are typically called “factor rates.” Unlike the APR charged on a term loan, a factor rate doesn’t amortize over the course of repayment. They’re also usually expressed as a decimal instead of a percentage. If you’re approved for an MCA with a factor rate of 1.5, you’re essentially paying the provider $1.50 for every dollar you borrow ($100,000 X 1.5 = $150,000). With this simple calculation you can figure out the total cost of borrowing.

A merchant cash advance is one option if you need cash quickly and aren’t able to secure other forms of credit. However, it’s critical to make sure that the costs of the MCA make financial sense for your business. Because they’re typically easy to obtain, they come with a premium cost and can cause cash flow problems down the road.