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How Does a Merchant Cash Advance Work?

Jun 21, 2021

Managing cash flow is a high priority for most small business owners. Cash flow problems account for 82% of business closures each year. Securing a merchant cash advance, or MCA, can offer a short-term funding solution for your business.

But what exactly is a merchant cash advance, and how does it work?

What is a Merchant Cash Advance?

An MCA provides the borrower with a lump sum of money, often available within a few days of application approval.

This is repaid through fixed daily deductions from the borrower’s bank account via ACH payments, plus a fee called a factor payment.

A merchant cash advance is not technically considered a loan. Thus, extensive credit checks and long approval times are unnecessary, as the regulations surrounding them are different from traditional bank loans.  

What is the Application Process?

The chief benefit of an MCA is the quick application process. Many lenders have simple, online applications that take only a few minutes to complete.

You can expect to provide basic information about your business, like:

  • Business name
  • Annual revenue
  • Years in business

Funds are available as a lump sum and are often available within a few days of approval. Repayment periods are typically shorter than with a traditional loan; usually under 18 months.

How Does Repayment Work?

Repayments vary depending upon the lender. With Reliant, repayments take the form of a small, fixed deduction from your business’s bank account each day. This takes the place of large lump sum repayments, as with traditional bank loans.

This makes MCA repayment easy because it happens as small daily deductions. This helps manage cash flow issues because large sums are not being drawn out all at once, which might make it difficult for businesses to retain enough cash on hand.

What is the Interest Rate?

Merchant cash advance fees aren’t calculated as interest rates. They use something called a factor rate. This varies depending upon the borrow and lender in question, as well as the amount of money being borrowed and the repayment time.

Factor rates are typically between 1.2 and 1.5. So, a merchant cash advance for $20,000 with a 1.2-factor rate means you multiple the lump sum by the factor to get the total you are responsible for repaying.

This would mean that you are responsible for repaying $22,400. This is not recalculated as repayments are made, unlike with the interest on a loan. You simply chip away at the amount through the payments made as small daily withdrawals.

Why Choose a Merchant Cash Advance?

Small business owners often turn to credit cards, personal savings accounts, or loans from friends and family to try to resolve cash flow problems. An MCA offers an alternative that secures larger amounts of capital, more quickly than stopgap measures.

Final Thoughts

According to SmallBizGenius, About 64% of business owners begin with $10,000 or less in funding, while almost 25% start with no funding at all.

Traditional bank loans provide low-interest rates but are often inaccessible for many small business owners. Merchant Cash Advances provide an alternative source of funding for small businesses that is quick and easy to access.

It can take less than 30 seconds to apply here.


$3,098,641,569 dollars funded