A Guide to MCA Loans

By Bill Lyons | Published on August 8, 2023

A merchant cash advance (MCA) loan is a type of lending that is based on the average value of credit and debit card receipts taken in by a business. Merchant cash advances typically have a short application process, no credit check requirements, and are typically approved in 1-3 days.

While there may be times where a merchant cash advance can help you get quick cash to cover a shortfall or take advantage of an opportunity to buy inventory, this is an expensive and risky financing option. The interest rates on merchant cash advance loans tend to be higher than other forms of short-term lending and they can become very expensive if not used carefully.

Rather than taking out a merchant cash advance, small businesses should consider looking into other financing options that can be more affordable, flexible, and catered to their needs. Read on to get a better understanding of the meaning of MCA loans, how they work, and alternatives to this type of financing.

What Is an MCA?

While commonly referred to as MCA loans, a merchant cash advance is a type of alternative financing rather than a business loan. With this type of financing, a financing company provides a business with a sum of money upfront. In exchange, the business gives the financing company a percentage of future debt and credit card sales until the loan amount, fees, and interest are paid back.

MCA loans typically don’t require a credit check or other forms of income verification and creditworthiness to qualify. Instead, the lending criteria is based on the credit and debit card receipts generated by the business. You show proof of your receipts with a bank statement from your bank account or merchant service account.

How Does a Merchant Cash Advance Work?

A merchant cash advance works through the review of your past credit and debit card sales to determine your average daily receipts. The lender offers you a loan that’s based on a percentage of your average receipts, informs you of the interest rate, APR, repayment terms, and frequency of payments. If you accept the offer, the lender funds your account and then you pay a percentage of your credit and debit card sales to the lender until the loan has been repaid.

The cost of taking out an MCA loan is determined using something that’s known as a factor rate. The factor rate for MCA loans typically falls between 1.1 and 1.5. You can calculate the amount an MCA loan will cost by multiplying the total loan amount by the factor rate and then adding on any additional fees charged by the lender.

For example, say you get approved for a $100,000 merchant cash advance with a factor rate of 1.5 and a $1,000 fee. The amount you have to pay back is $151,000, and the repayment period is anywhere between three to 18 months, depending on the amount you borrow and the terms offered by the lender.

The amount you repay is based on a percentage of your daily or monthly credit and debit card receipts. That means if you generate $60,000 a month in sales via credit and debit card sales, and your repayment percentage is 20%, you’re going to pay $12,000 a month towards the loan. Given your repayment amount is $151,000, you’ll be repaying the loan for over a year and the total cost of financing will amount to $51,000, assuming you make all of your payments on time. Ultimately, the interest rate on the MCA loan in this example is 33.88%.

So, as you can see, MCA loans carry a very high interest rate. The reason why the fees and average interest rates are so high on MCA loans comes down to the fact that borrowers tend to be high-risk. The lender knows that they are taking a chance with a borrower that might have a high DTI ratio and come with an increased risk of default. This is also why the lender withdraws money from your merchant or bank account, as it guarantees repayment.

Pros and Cons of Merchant Cash Advance Loans

Like with any type of financing, you should weigh the benefits and drawbacks of a merchant cash advance loan before taking one out. While this type of financing can seem convenient in some situations, it’s important to remember that it comes with a high cost in the long run.

Pros of MCA loans

The biggest benefit provided by a merchant cash advance loan is the fact that the loan settles quickly and your account receives funding in anywhere from 48 to 72 hours. You don’t have to fill out a lengthy application, provide proof of income other than your credit card sales, and you don’t need to undergo a credit check. Some of the pros of MCA loans include:

• Funds are provided in days.
• No collateral is needed to secure the loan.
• Credit rating isn’t a factor.
• No restrictions on the use of the funds.

Cons of MCA loans

There are always risks that come with all types of financing, but MCA loans are typically more expensive than other types of lending. They also come with rapid repayment terms in most cases, have high fees and interest rates, and cut into your income from credit and debit card sales until the loan is paid off. This can lead to cash flow problems for your business until the loan is paid off.

With that being said, some of the cons of an MCA loan include:

• High interest rates and fees.
• Not subject to federal lending regulations.
• Reduces profitability.
• Payment is taken daily or monthly from your merchant account or bank account.
• The risk of NSF fees. Banks charge non-sufficient funds fees when the automated MCA payment doesn’t clear.
• No savings are realized when the loan is paid off early.
• Payment is not fixed.

Getting an MCA loan introduces uncertainty into your cash flows due to its high cost and method of repayment. Understanding the pros and cons of this type of lending helps you make a strategic decision as to how it can help you when you need a fast influx of cash.

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Alternatives to MCA Loans

Although merchant cash advances can allow your business to quickly access capital, they’re a short-term solution with costly consequences. MCA loans are very expensive and can negatively impact your company’s cash flow in the long run. Rather than taking out an MCA loan, consider these alternative financing options.

Home equity loans

A bank statement home equity loan (HELOAN) can be a great solution for small business owners who need an influx of cash. With a HELOAN, you can quickly access capital and improve cash flow for your business. Plus, this type of financing tends to be much cheaper than a merchant cash advance.

Rather than paying 30% to 90% interest like you would with an MCA loan, you can often get a HELOAN at an interest ranging from 9.99% to 15%. Using a HELOAN, you can convert business debt into a second mortgage that has lower rates and better terms than a merchant cash advance.

Additionally, as a self-employed borrower, you can qualify for a home equity loan using bank statement deposits as opposed to tax returns. This enables you to tap into the equity of your property and quickly generate capital for your business.

Asset-based loans

Asset-based lending allows you to qualify for financing based on your existing liquid assets. Using an asset-based loan, you can qualify for financing with assets such as:

• Checking and savings accounts
• Certificates of deposit (CDs)
• Investment account
• Money market accounts

An asset-based business loan can be a good option for self-employed small business owners and real estate investors who have liquid assets and are searching for capital.

Bank statement loans

With a bank statement loan, you can qualify for financing using bank statements rather than tax returns or pay stubs. Bank statement loans require 12 to 24 months’ worth of bank statements in order to verify income and borrowers must have a credit score of 620 or above. If you qualify for a bank statement loan, you may be able to access financing at a lower interest rate than you would get with an MCA loan.

Explore Alternatives to MCA Loans

An MCA loan is a type of alternative lending for small business owners who accept credit and debit cards as payment and are in need of cash fast. The amount of capital you can get with an MCA loan is based on the ability of the borrower to repay the debt in a relatively short period of time. Repayment is taken from the merchant or business bank account, and the length of the loan can be anywhere from three months to three years.

However, the fees and interest rates for an MCA loan are high, and they impact your cash flow until the loan is repaid. As a result, it’s rare that MCA loans are the best option for small business owners in need of capital.

Instead of taking out an MCA loan, work with the team at Griffin Funding to convert your business debt into a home equity loan. Using a home equity loan or home equity line of credit (HELOC), you can tap into the equity of your property and get financing at a much lower cost that you would with an MCA loan.

In addition to home equity loans, Griffin Funding also offers Non-QM loans that can provide an alternative route to qualifying for financing. Reach out to Griffin Funding today to learn more about your options and determine what the best type of financing is for your business.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.