August 2, 2021

Merchant cash advance financing for founders


In this article, we’ll walk you through:

  • What’s in an MCA agreement
  • Who's eligible for merchant cash advance financing
  • How it may benefit small business founders

If you’re a small business owner, you may have come across the term merchant cash advance (MCA) and wondered whether it is a funding option for you. For many founders looking to avoid lengthy approval processes and stringent credit requirements, merchant cash advance financing can solve potential cash flow problems. Here’s what you need to know about MCAs and whether they’re right for you and your business. 

An introduction: What is a merchant cash advance?

It’s important to understand that a merchant cash advance is not a loan. Rather, it’s a financial product in which a lender purchases a percentage of your company’s future credit card sales. Like other sources of alternative funding (such as loans and revolving credit), MCAs offer specific advantages and disadvantages. For that reason, it’s best to evaluate the pros and cons of this financing prior to signing a merchant cash advance agreement to ensure it’s right for your business

What’s in a merchant cash advance agreement?

A merchant cash advance agreement is a contract in which a lender agrees to offer a cash advance that is to be repaid against future revenues of the business. In addition, the borrower agrees to a fee, usually a fixed interest rate. The fee is outlined in the contract, along with the lender’s methods of collection. 

Generally speaking, MCA agreements are between a lender and a business owner, and include the following:

  • Advance amount: The lump sum that the borrower will receive once the MCA is approved. This amount is decided upon based on your business’ financial health. 
  • Payback amount: This is what the lender is due—it includes the additional fees outlined above.
  • Holdback: This is an agreed-upon percentage of your business’ daily credit card payments that are withheld as payment for the MCA. We’ll talk about this figure in more detail later. 

Typically, MCA agreements do not include a fixed repayment date, given the advance is only considered paid in full once the principle and predefined interest are collected. Some contracts do however include additional details, such as the screening process, in which the lender determines the borrower’s eligibility. 

What is a holdback payment? 

The amount of cash that you are eligible for will depend primarily on your business’ average monthly credit card sales. For that reason, the MCA could be as little as 50% of your monthly sales or balloon up to 250% of your monthly sales. In order to repay this amount, a small percentage is calculated and taken with each credit card sale over the length of the repayment period. This percentage, which is specified in the MCA contract, is called a “holdback”. 

This holdback rate, also known as a “retrieval rate”, is usually anywhere between 5 and 20%. Factors that affect this amount will include the total amount of your advance, daily credit card sales, and the repayment period. Repayment periods can last anywhere from 90 days to 18 months. How quickly you repay your advance will depend on how well your business is doing— more specifically, how many credit card transitions you’re doing per month. The more transactions, the faster you’ll repay the advance. That being said, should you have a slow month in terms of credit card sales, the amount withdrawn will be lower, adjusting to your company’s fluctuating cash flow. 

How do I benefit from merchant cash advance financing? 

The most significant benefit of a merchant cash advance for startups is that you can access capital quickly, without too much red tape. This can be especially helpful if your business needs to cover unexpected and short-term expenses, such as purchasing inventory to cover an especially larger order, preparing for a high-demand period such as BFCM, or replacing equipment. 

Merchant cash advance financing is also an apt option for founders who do not qualify for more traditional bank funding, whether it’s because their business is relatively new (and thus may not yet have enough assets to offer as collateral) or due to a low credit score. 

Who's eligible for merchant cash advance financing? 

MCAs are not industry-specific, and are well-suited to businesses of all shapes and sizes—as long as you can prove a regular cadence of credit card transactions. As a founder, you will need to ensure that your company’s daily credit card sales are steady enough to guarantee repayment. This amount will vary from lender to lender: one might require you to maintain at least $1,000 in monthly credit card transactions, while another could require $5,000. 

In general, the minimum merchant cash advance requirements are:

  • A minimum of 1 year in business
  • At least $50,000 in annual revenue
  • A credit score of 500 or more 

Keep in mind that the above minimum are merely guidelines. Some lenders will consider you for an advance even if you’ve been in business for less than a year, or if your credit score is below 500—but you will most likely have to pay higher rates and fees to compensate. Each lender operates on a case-by-case basis, so it’s best to reach out to your potential lender to find out whether you qualify.