What is a Merchant Cash Advance?

A merchant cash advance (MCA) isn’t really a loan, but rather a cash advance based upon the credit card sales deposited in a business’ merchant account. A business owner can apply for an MCA and have funds deposited into a business checking account fairly quickly—sometimes as quickly as 24 hours after approval.

MCA providers evaluate risk and weight credit criteria differently than a banker or other lenders. They look at daily credit card receipts to determine if a business can pay back the advance in a timely manner. As a result, rates on an MCA can be much higher than other financing options so it’s critical you understand the terms you’re being offered so you can make an informed decision about whether or not an MCA makes sense to meet your needs.

What is Holdback?

Within the context of an MCA, the term “holdback” is probably the least familiar. The holdback amount is the percentage of daily credit card sales applied to your advance. The holdback percentage (somewhere between 10 percent and 20 percent is typical) is usually fixed until the advance is completely repaid.

Because repayment is based upon a percentage of the daily balance in the merchant account, the more credit card transactions a business does, the faster they’re able to repay the advance. And, should transactions be lower on any given day than expected, the draw from the merchant account will be less. In other words, the payback is typically relative to the incoming credit card receipts.

The Difference Between Holdback Amount and Interest Rate

There’s a difference between the interest rate a business owner is charged for the advance and the holdback amount. Most MCA providers charge what’s called a “factor” rate. Unlike a traditional term loan, the rate isn’t amortized over the course of the advance. A typical factor rate for an MCA could range between double and triple digits depending upon the provider.

Is a Merchant Cash Advance Right for Your Business?

While an MCA might make sense for a business that needs cash quickly to take advantage of a short-term opportunity, it’s critical to make sure the costs of the merchant cash advance otherwise make financial sense for the business. Because qualifying criteria is much less stringent than traditional small business lenders, an MCA comes with a premium cost. Nevertheless, there are business owners who successfully use this option to access capital for their businesses.

NOTE: Because a merchant cash advance is not a loan and providers do not report your payment history to the business credit bureaus, it does not help build or strengthen a business credit profile. Additionally, because rates vary from provider to provider, and can be much higher than other types of financing, it’s important to understand all the terms before signing on the dotted line.

Is There an Alternative to a Merchant Cash Advance?

The short answer is yes. Many small business owners find a short-term business loan to be an alternative. And, with a strong credit profile, others are able to leverage a small business line of credit to meet short-term needs for additional cash flow.

A short-term loan from OnDeck, for example, could have a term as short as a few months and offer terms more familiar to a small business borrower. Depending upon the nature of the loan, periodic payments will be either daily or weekly, allowing the small business owner to spread the burden of debt service throughout the month, rather than requiring one larger payment at the end of the month.

OnDeck also reports your good credit history to the appropriate business credit bureaus, so may even help strengthen your business credit profile.