Merchant Cash Advance: Is It Worth It?

By June 8, 2023 uLink Blog
Business owner receiving merchant cash advance.

Times are tough right now—especially for small business owners. 

With interest rates reaching a 16-year-high, traditional loans are out of reach for most. Fortunately, there are other options available beyond traditional lending

In fact, you may be able to get money in just a few business days with a merchant cash advanceMCA for short. 

Today, we’ll discuss the core advantages MCAs offer immigrant business owners, as well as uncover the main disadvantages. Then we’ll introduce three powerful alternatives to help you fund your business venture. 

At the end of this article, you’ll have a good idea of what kind of funding works best for your business. 

What Is a Merchant Cash Advance (MCA)?

A merchant cash advance (MCA) is an alternative funding option for small businesses, where you receive a lump sum of cash from a lender within 1-3 business days.

The amount of cash you receive depends on the value of your business’ credit card sales. 

Rather than requiring monthly loan payments, a merchant cash advance lender takes a predetermined percentage of your business’ daily (or weekly) revenue. 

This percentage is often called the holdback rate.

Note that MCAs are only available to businesses that accept card payments. Generally, cash-only businesses will not qualify for a merchant cash advance

Benefits of MCAs for Small Businesses 

There are many reasons business owners choose a merchant cash advance. Above all, an MCA provides rapid access to funding. 

Whereas traditional loans can require several weeks of waiting, MCA issuers are able to provide a large amount of cash in as little as 48 hours.

That makes MCAs an ideal solution for business expenses that require immediate attention, like repairs and renovations.

In addition to their unparalleled speed, an MCA provides a few other advantages for small business (SMB) financing:

1. Superior Flexibility 

With an MCA, you’ll only make payments based on what your business earns

When credit card sales are up, you can pay back the MCA faster. Conversely, when credit card sales are down, you simply won’t have to pay as much. 

This can make MCAs more appealing than traditional term loans, which have fixed monthly payments. 

2. Accessible Requirements 

It’s no secret that traditional loans have daunting credit score requirements. 

Fortunately, MCAs are much more accessible.

In fact, if you’re new to credit or have a low FICO score, you can still qualify for an MCA.

After all, merchant cash advance companies provide capital based on your cash flow, not your credit.

3.  No Collateral Requirements

Unlike a traditional loan, MCAs don’t require any additional collateral to get started.

This makes MCAs optimal for newer ventures, for businesses with limited assets, or for 

businesses with assets already claimed as collateral for other loans. 

Again, there’s only one thing MCA companies need to back up your loan: your credit card receipts. 

Drawbacks of MCAs for Small Businesses

While the benefits of merchant cash advances are clear, they introduce several definite drawbacks you should know about. 

The primary concerns include the following:

1. High Costs

MCAs are very expensive, especially when compared to other types of business loans. 

Rather than featuring an interest rate, MCAs include a factor rate that gets multiplied by the lump sum. In most cases, the factor rate hovers between 1.2 to 1.5

For example, let’s say you receive a $25,000 merchant cash advance. If you multiply that figure by a factor rate of 1.5, the total repayment would be $37,500. In other words, you would pay $12,500 just to receive the $25,000 lump sum

Note: while it can be rather difficult to calculate an MCA’s annual percentage rate (APR), they can reportedly climb as high as 350% or more

2. Confusing Rates & Terms

While MCAs are relatively easy to obtain, their contracts can be difficult to understand. 

Here’s why: MCAs are considered a commercial transaction, not a loan

Therefore, MCA companies are not bound by the Truth in Lending Act, the federal legislation that helps protect consumers from predatory lenders. 

That’s why there’s no standardization in MCA contracts, no disclosure requirements (at least not at the federal level), and no effort to ensure consumers understand what they’re buying. 

If you decide to pursue an MCA, be sure to clarify all factor rates, APRs, and repayment schedules before completing the transaction. 

Important: if you have any questions or concerns, contact a financial advisor. 

3. Debt Cycle Risk

Though an MCA provides a lump sum of cash, it also puts a claim on your incoming sales. 

After all, most MCAs are repaid daily—or weekly, in some cases. That means the lender has a recurring claim on part of your revenue

This can put a heavy strain on your business’s cash flow and profitability. 

If you’re not careful, the daily deductions of an MCA could force you to tap another loan (or max out your credit cards) to help keep afloat.

That’s why an MCA can quickly initiate a debt cycle, which occurs when you’ve borrowed more than you can confidently repay. 

Pros and Cons: The Reality of Traditional SMB Financing

While MCAs sound like an interesting SMB financing option, they’re clearly not a one-size-fits-all solution for every entrepreneur. 

So…why do many business owners choose MCAs over other available options?

Here’s why: traditional bank loans are simply too difficult to acquire, especially for small businesses that lack the track record, data, and capital to obtain funding.  

For example, most SMB owners with a credit score below 700 likely won’t get approved for a traditional loan.  

So, with traditional loans out of the picture, many small businesses turn to merchant cash advances, in spite of the disadvantages.

Nevertheless, MCAs can provide meaningful leverage, so long as the payment terms are clearly defined (and responsibly managed). 

3 Alternative Options for Immigrants

Here’s some more good news: traditional loans and MCAs aren’t the only SMB financing options available.

Far from it! In fact, there are three other powerful financing tools to consider for your small business. 

1. Business Line of Credit 

A business line of credit is ideal for handling short-term expenses, like payroll and supplies. 

With a business line of credit, you’ll only pay interest on the amount you owe—just like a regular credit card. 

Plus, most business lines of credit are unsecured, which means that you won’t have to put up any collateral (like real estate or other assets).

And once repayments are made, you’ll be able to renew your credit limit and keep the cash flowing. 

Find the latest (and most attractive) business line of credit rates here.

And for an in-depth analysis of a business line of credit, check out our exhaustive guide

2. Crowdfunding

Crowdfunding is a very popular (and convenient) alternative to MCAs. 

After all, it can be done easily online through platforms like Patreon, Indiegogo, and StartEngine

Generally speaking, there are four main types of crowdfunding to consider:

Whichever path (or platform) you choose, you can quickly increase your visibility, market your strategy, and raise money to power your small business. 

Just remember: in most cases, everything you borrow will eventually have to be paid back. So, start small, establish a good rhythm, and reap the rewards only online crowdfunding can offer. 

3. SBA Loans

SBA loans are provided and guaranteed (in part) by the U.S. Small Business Administration

Founded in 1953, the SBA was formed for one overarching purpose: to deliver accessible capital with low interest rates to underserved entrepreneurs

While there are many SBA loans, the most common types include:

  • SBA 7(a) Loans
  • SBA Microloans
  • SBA 504 Loans

Each loan type provides a specific amount of cash. 

For example, an SBA 7(a) loan allows business owners to borrow up to $5 million, while an SBA Microloan offers up to $50,000.  

Want to learn more about SBA loans? Click here to check out our comprehensive guide.

Moving Forward 

While financing a business isn’t easy, there are many great ways to help get the job done.

If you’re unable to qualify for other funding options, MCAs can provide a helpful path forward—especially in the short-term.

As with any financial product, however, take your time to carefully assess potential MCA providers and their terms before applying, and be sure to develop an effective repayment plan.

Regardless of how you chose to finance your business, at uLink your financial freedom is our #1 priority. 

That’s why we provide great exchange rates and fees starting as low as $0: so you can send more money home than ever before. 

Miles from home—just moments away with uLink.

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