8 Things Small Business Owners Need to Know About Merchant Cash Advances

Merchant cash advances are a relatively new form of funding that emerged after the 2008 recession in response to a greater need for accessible small business funding. Available from alternative lenders, including direct online lenders like Greenbox Capital®, merchant cash advances have less restrictive approval requirements and have made more working capital available to more businesses, including underserved communities like minority- and women-owned businesses.

Because of their youth, many myths and misconceptions about merchant cash advances (MCAs) persist. In reality, MCAs can be a very effective source of short-term funding or fast working capital for businesses that may not be approved for a traditional bank loan.

To help clear up the confusion, we’re sharing some of the most important things small business owners need to know about merchant cash advances. Let’s jump right in.

A merchant cash advance is not actually a loan

A merchant cash advance is technically not a loan—it’s actually a “non-loan” form of financing known as an asset purchase.

When you receive a merchant cash advance, your lender is actually purchasing a portion of your business’s future revenue in exchange for a cash advance up front. This means that you’ll receive working capital when you need it and your lender will receive a portion of your daily or weekly credit card sales until the advance has been repaid (along with any fees—more on this below).

MCAs are controlled under different regulations than traditional loans and lenders. These regulations vary between jurisdictions but are generally not as strict as those that govern traditional loans. This means that alternative lenders can offer better term lengths and more flexible funding that is tailored to the needs of the borrower.

MCA applications are much simpler and easier than traditional loans

Merchant cash advances work differently than other types of funding. There’s no need to go into a bank to fill out a lengthy application—instead, MCA applications are filled out online and are typically much shorter and easier to navigate than traditional loans. Once you submit your initial form, a representative from the lending institution will then contact you to finish your application. You can be expected to provide:

  • Your business number
  • Social insurance number
  • Several months of credit card statements
  • Photo ID
  • Business bank account number
  • Bank statements

Depending on how quickly you are able to supply the requested information and documentation, your MCA could be approved and deposited in as little as one business day.

Larger funding amounts are available from some lenders

Typically, the amount of your advance is based on your projected future sales rather than your credit history and other historical factors. Most MCAs average around $38,000 but some lenders offer funding up to $500,000.

Merchant cash advance loans are popular for funding businesses that prefer repaying the loan on a daily basis as a percentage of sales. If you are a small business looking for a top merchant cash advance lender in Canada, click here!

You can use your funds however you want

There are no restrictions on how your funds are used, but merchant cash advance funding is typically best used to support growth strategies that will help increase revenue, such as:

  • Purchasing new inventory or raw materials in bulk
  • Boosting your marketing strategies
  • Investing in training or continued education
  • Taking advantage of time-sensitive opportunities to grow.

Merchant cash advance qualification requirements are more favorable to more small businesses

Qualification requirements for merchant cash advances are much less restrictive than traditional loans, which are typically only approved for wealthy business owners with property.

Alternative lenders make working capital available to a greater number of deserving small businesses by providing financing that is based on the future potential and projected revenue of the business rather than your credit score and financial history. These criteria will impact your terms and fees, but they’ll have less of an impact on your approval.

To receive an MCA, your business must accept debit and credit cards and have a minimum of 6 months of processing history. Otherwise, no collateral is required.

GREENBOX TIP: Not all alternative lenders are reputable. Do your research and don’t sign a contract with a lender that engages in “loan stacking”—a term used to describe when an advance is granted in order to repay another advance. Greenbox Capital never engages in loan stacking.

There are no fixed monthly payments

Unlike traditional loans, merchant cash advances are not repaid in monthly installments. Instead, payments will be automatically deducted from your business’s daily or weekly debit and credit card sales. The amount of your payment is based on your sales—on days with lower sales, your payments will be smaller; on days with higher sales, your payments will be larger.

Merchant cash advances are not always more expensive than traditional loans

Because merchant cash advances have shorter terms and are easier to qualify for than other forms of funding, they may have higher rates than traditional loans or other forms of alternative funding. However, it’s a common misconception that MCAs always have higher rates than other types of funding. Ultimately, your fees will be based on your business’s risk assessment and how quickly you’ll be able to repay the advance.

Merchant cash advances do not use a standard interest rate or APR—instead, they use something called a “factor rate”. Unlike interest rates, which compound as you pay off your loan, a factor rate uses a decimal figure to show in simple terms how much “extra” you’ll owe on the original amount of the merchant cash advance.

For example, if you’re given a factor rate of 1.3 on an MCA of $1,000, you’ll owe $1,300. Your factor rate is determined by your business’s risk assessment—the stronger your business’s financial history, the lower your rate should be.

Who should apply for a merchant cash advance?

Merchant cash advances make sense for:

  • Businesses that process a lot of debit or credit card transactions
  • B2C businesses that need smaller amounts of funding
  • Businesses with strong cash flow who may not meet the strict requirements of the SBA or banks, such as newer businesses, businesses with lower credit scores, and those in ‘high risk’ industries
  • Businesses that need fast funding to support growth or who don’t have the time to navigate the complicated application process of a bank or the SBA—approval can be made in as little as one business day
  • Businesses owners that do not have collateral, such as real estate or other major assets

Flexible Small Business Funding When You Need It

Merchant cash advances offer a number of advantages over other financing options like traditional bank loans, including a simplified application, flexible approval requirements, and faster application turnaround. With funding available in as little as one business day, many businesses can benefit from a merchant cash advance, including businesses with strong financial histories.

Greenbox Capital is an alternative lender supporting the growth of small businesses in Canada and the United States. Work with them to get fast funding with ongoing communication throughout the process!

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Alfredo Rosing

Alfredo Rosing is the Vice President of Marketing at Greenbox Capital®. With over 25 years of combined experience in marketing and financial services, Alfredo is an expert on innovative financial technologies with a passion for connecting consumers and businesses with socially responsible funding. Prior to joining the Greenbox Capital team, Alfredo launched an award-winning online lender that was recognized as the winner of the 2017 Fintech Awards US Firm of the Year for Lending Innovation Award. Alfredo is a graduate of Southern New Hampshire University with a BS in Marketing.