What Is a Merchant Cash Advance? (+ How to Get One)

Merchant cash advance

Cash is king in retail. 

Some 66% of small businesses face financial challenges; 43% say the biggest challenge is paying operating expenses. If you don’t have cash to pay for inventory, expenses, or unforeseen costs, you’ll struggle to thrive. 

Are you short on cash? A merchant cash advance offers hassle-free, low-cost financing that can help you get over financial obstacles. Learn how they work and how you can get one to inject capital into your business and grow. 

What is a merchant cash advance (MCA)?

A merchant cash advance is a business funding option that you can repay using a percentage of sales, plus a small fee. It’s best for small businesses that accept card payments from their customers. You only repay the loan as more cash flows into your business. 

How does a merchant cash advance work?

Merchant cash advances are different from traditional business loans. They are unsecured, which means you don’t need any assets, like inventory or property, to get funding. With an MCA, the lender gives you a lump sum of money that you repay through sales. 

Here’s how the process works:

  1. A lender looks at your sales, generally the average value of card sales. 
  2. They offer you a lump sum of cash. 
  3. You accept the advance. 
  4. You pay the lender a percentage of card sales every month.

You can often choose daily, weekly, or monthly repayment plans. The lender deducts a percentage of sales (usually 10%). 

The amount you pay depends on your income. For example, if you have high credit card sales one week, you’ll pay the advance faster. The flexibility of cash advances works well for businesses with seasonal highs and lows.

Each lender has different eligibility requirements for getting a merchant cash advance. For example, to get an MCA from Shopify Capital, you need:

  1. A Shopify seller’s account and business bank account.
  2. A store located in the United States, Canada, or the UK.
  3. A business assessed as “low risk”.
  4. To use Shopify Payments or a compatible third-party payment provider.
  5. Meet a certain level of sales regularly. 

Overall, a merchant cash advance is an easy and fast way to get business funding if you need it. 

I really love the flexibility of the repayment system of Shopify Capital. On busy days I repay more, and on slower days I repay less.


Take control of your cash flow

Always know when to expect payouts. Every Shopify plan comes with Shopify Payments, which lets you track in-store and online sales and payments from the same back office.


Pros and cons of a merchant cash advance

Again, merchant cash advances offer you a quick way to get business funding. The application is approved in 24 to 72 hours, and MCA’s have a high approval rate.

Let’s look at some advantages and disadvantages of getting a merchant cash advance. 

Pros

  • Flexibility. Flexible payment options—pay what you can afford based on sales.
  • Easy repayment. The lender will take repayments off the top of sales, automatically, making it easy to repay at a fair pace. 
  • Easy access. You can secure a cash advance without collateral and with little-to-no credit. 
  • Fast funding. Funding happens quickly, in most cases between two and three days.
  • Low risk. The loan pays itself off; no manual loan payments are necessary. 
  • Transparent. No hidden fees; cost of loan is set at start.

Cons

  • Expensive. The cost may be higher than a standard loan. MCA’s can cost between 20 and 50% of the principal.
  • Frequent payments. You’ll repay the MCA on a daily or weekly basis, versus making one loan payment each month.
  • Not a long-term funding option. MCA’s often have high rates and are for short-term cash relief.  
  • Only for businesses that take card payments. Lenders choose whether or not to give you the MCA based on card turnover, or how many card payments you accept over a period of time. If you get a lot of cash payments, a lender could deny your MCA request. 

Merchant cash advance terms and features

  • Principal
  • Factor rate
  • Payment period and frequency
  • Percentage deduction of credit card sales

These are the common terms and features associated with merchant cash advances.

Principal

The principal refers to the amount you borrow and must repay. When you take out an MCA, the size of your loan is the principal. As you make payments on the MCA, a portion of those payments reduces your principal, and the rest pays the fee determined by your factor rate.

Factor rate

The factor rate determines how much you’ll pay for the MCA. For example, if your MCA amount is $10,000 and your factor rate is 1.2, your total payback will be $12,000 (10,000 x 1.2). 

Factor rates vary by lender and business, but can range between 1.09 and 1.5. 

Payment period and frequency

The payment period is the timeframe you have to pay the loan back. MCA’s have a payment period of anywhere from three months to 24 months. 

Frequency is how often you’ll pay back the MCA. Most business owners make daily or weekly payments. 

Percentage deduction of credit card sales

You repay a cash advance by giving a percentage dedication of credit card sales. The number varies by lender, but expect to pay between 5% and 20% of sales. 

How to get a merchant cash advance

Getting a merchant cash advance is simple. Many providers offer an easy online application with quick approval times. Applying for an MCA takes a few minutes. Even if you have a short history and poor to average credit, you may be eligible for a merchant cash advance. 

Once you decide an MCA is right for you, find a provider who will give you the best deal. If you have a Shopify store and use Shopify Payments, you can check your eligibility with Shopify Capital. 

If you use another provider, be prepared to submit the following in your application:

  • Company structure
  • Business income
  • Estimated income growth 
  • Bank account statements 
  • Credit card processing statements 

We weren’t old enough as a business to be approved for a [traditional] loan, and all the other types of debt financing that we explored were just terrifying... That’s when we found out about Shopify Capital.

Helena Price Hambrecht, Co-Founder of Haus

💡 PRO TIP: Avoid lengthy application processes, paperwork, and credit checks, and get funding within days with Shopify Capital. Get the funds you need to open a retail store, invest in staff, inventory, and marketing, and pay it off as a flexible percentage of your sales.

Uses for merchant cash advances

Common ways you can use an MCA include the following:

  • Purchasing inventory
  • Purchasing equipment
  • Marketing
  • Cash flow relief
  • Unforeseen costs

Purchasing inventory

Keeping products in stock is critical to retail growth. Sometimes, retailers are limited to how much they can sell because they don’t have the money to buy inventory. 

With an MCA, you can stock up on inventory, get ready for seasonal sales, or take advantage of bulk discounts. For example, if you want to prepare for the BFCM season and you’re running low on capital, you can get an MCA to stock up ahead of time. 

The next day, the money was in my account. I immediately bought a ton of inventory; more inventory than I've bought in the past two years.

💡 PRO TIP: Shopify POS comes with tools to help you control and manage your inventory across multiple store locations, your online store, and warehouse. Forecast demand, set low-stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

Purchasing equipment

Having sufficient capital allows you to invest in new equipment, which can improve efficiencies and help you sell more. For example, if you need signage for your store, or mannequins and shelving to showcase your clothes, you can get funding fast from an MCA. 

Marketing 

Whether it’s Google ads or building a social media presence, use money from your MCA to support your marketing efforts. 

You can invest in:

  • A higher ad budget to get the word out and convert more customers. 
  • Refreshing your brand identity with new packaging and photos. 
  • Running a contest to get more engagement on social media.
  • Partnering with an influencer to tap into new audiences. 

💡 PRO TIP: You can set up, track, and manage local inventory listings and Smart Shopping Campaigns from Shopify’s Google channel. Get all the perks of marketing your business on Google without jumping between accounts.

Cash flow relief

Cash flow is a big problem for retailers. One study found that 57% of UK small business owners have experienced cash flow challenges, leaving some unable to pay debts and pay employees

Since the approval process for MCA’s is quick, you can get cash into your business for:

  • Wages
  • Supplies
  • Materials 
  • Distribution 
  • Events

💡 PRO TIP: Take control of your cash flow with Shopify Payments. Get a complete view of your business finances, know when to expect payouts, track in-store and online sales and payments, and manage your money where you run your business.

Unforeseen costs

Additional funding can also help cover unforeseen expenses. For example, you can use a cash advance to pay for equipment maintenance or upgrades, cover professional service costs, or take care of any other hidden costs that come up. 

Examples of merchant cash advances

  • Shopify Capital
  • Rapid Finance
  • Reliant Funding

Here are some potential options for securing a merchant cash advance.

Shopify Capital

Shopify Capital webpage

Shopify Capital is a financing program that offers retailers merchant cash advances. If eligible, you’ll receive a lump sum of cash for a fixed borrowing cost. The factor rate depends on your risk profile. 

You can’t directly apply for a merchant cash advance. Instead, Shopify will notify you if you are eligible for funding. If you choose to apply, Shopify will then review your request and get back to you with a response within two or three business days. 

Rapid Finance

Rapid Finance website

Rapid Finance is a good merchant cash advance option for small businesses owners with poor credit. You only need three months in operation and a minimum personal credit score of 550. Rapid Finance is a bit more expensive, but is easy to get started and can get you money within 24 hours. 

Advance amounts: Between $5,000 and $500,000 

Factor rates: Starting at 1.22

Reliant Funding

Reliant Funding website

Another option is Reliant Funding.The company offers MCAs up to $400,000, with factor rates based on your business qualifications. 

Reliant Funding has one of the fastest application processes, letting you apply in minutes and receive approval within hours. 

To qualify, you must have at least six months in business and process $10,000 in credit and debit card sales monthly. There are no minimum credit score requirements.

Advance amounts: Up to $400,000

Factor rates: Varies. 

Is a merchant cash advance right for your business?

A merchant cash advance can be a great short-term funding option for your business. With fast funding and flexible payment terms, an MCA can give your store a head start, or help you grow faster, so you can set yourself apart from your competitors.

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