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Merchant Cash Advance: Definition, How it Works, Types & Possible Downsides

Merchant Cash Advance(MCA) is a term used to describe a type of loan that allows you to use your cash flow to make purchases for your business. 

These are small-dollar loans, typically with an interest rate between 15% and 24%. You can take out as little as $5,000, but some providers give out much larger amounts.

How Do Merchant Cash Advances work?

This type of loan works similarly to a credit card advance, but instead of using your credit card balance as collateral, you use the current value of your daily/weekly sales as collateral.

Merchant cash advances are typically paid back using the funds a retailer accumulates from selling goods or services. 

The lender allows you to borrow money at an interest rate typically lower than what you would pay on a regular credit card or loan. For example, if you took out a $10,000 mini loan and paid it back over 30 days, your payment would be around $15 per day ($375 per month).

Types of MCAS

There are two types of Merchant Cash Advances: 

  • short-term 
  • long-term

Short-term loans are typically reserved for small businesses that need funds within 30 days or less. Long-term loans range from six months to one year and allow more extended repayment periods.

When’s the Best Time to Take Out an MCA?

Most businesses use merchant cash advances when they need money quickly. 

These products come in handy when you have cash flow problems or need instant money– without going through lengthy and expensive credit approval processes with traditional banks.

In essence, MCAs are an excellent way to fund your working capital needs, such as payroll, inventory, and utilities. 

Interest Rates on MCAs

The interest charged by MCAs is typically higher than credit cards, but the former charges an annual percentage rate (APR) instead of interest.

As with any loan, interest rates on MCAs vary. Lenders typically charge around 20% APR for an MCA that lasts six months or less–  much higher than the average credit card interest rate of 15-18% APR.

The interest rate on MCAs is typically higher than on personal loans because MCA lenders want to ensure that they will get paid back in full before they give out the money.

Proceed with Caution

There are some downsides to using an MCA. First, if you don’t pay back the initial amount in full or within 30 days, you’ll be charged a penalty fee equal to 1% of the outstanding balance per month until it is paid off. 

Second, if your business fails before the loan ends, your lender may try to collect from your assets or sell them at auction.

Lastly, if you fail to pay off your MCA before it expires or otherwise defaults on it, you’ll lose access to future loans from that same lender until your account has been cleared up.