Merchant cash advances, or MCAs, provide capital that is repaid through daily credit card sales. They are often viewed as a last resort for business, for good reason, and come with a lot of risks that don’t seem to outweigh the benefits. 

It is possible for MCAs to work for your business as long as you are fully aware of what they are and how they work.

What Are MCAs?

Historically, MCAs were used for big businesses that received the majority of their sales/transactions through credit cards. They would be given cash up front in exchange for a percentage of their credit and debit card sales later on. 

There are two types of MCAs. The first one uses the traditional method: cash upfront in exchange for a percentage of the business’ sales. The second one is cash that is paid through fixed weekly or daily payments until repaid in full.

How do MCAs Work?

Fees are based on an assessment to determine a risk factor. Risk factors are typically between 1.2 and 1.5. For example, if you borrowed $30,000 and had a risk factor of 1.2, you would multiply $30,000 by 1.2 which would equal $36,000. You would owe $36,000 total with $6,000 of it being fees. The higher the rate, the higher the fees. 

Pros vs. Cons

Many businesses use MCAs because they are fast, efficient, and flexible. It’s easy to receive funding as they only consider your sales history and it doesn’t require collateral (no secured funding) and when financed traditionally, when sales are low, your payment will be as well.

However, there are many disadvantages to using MCAs. The total cost of borrowing is expensive, oftentimes seeing APRs between 40%-350% with three-digit rates being the norm. There is also no federal oversight or regulation and there is no benefit to paying it off earlier. They often turn into cycles of debt: using one MCA to pay for another MCA with the only way out being bankruptcy and they’re known to be confusing. Reading the terms and making sure you understand them is imperative.

No matter the drawbacks, businesses have seen success using MCAs when done correctly. Contact 360 Commercial Capital today to discuss your business’ financial needs.