A merchant cash advance is the sale of future credit card sales or other receivables. Companies with predictable cash flow from sales can use this practice to smooth out cash flow. Essentially, the financier offers money up front for the right to collect a portion of a company’s future sales. The financier generally replaces the merchant’s credit card terminal with one that can direct part of those credit card sales to the financier’s accounts. Often, this kind of financing is offered in conjunction with credit card processing services. Rates tend to be higher than traditional financial sources, but the service is usually available to any merchant processing more than $2000 to $3000 in credit card transactions each month.
Industries like grocery stores, restaurants, and auto-repair shops have a harder time than most when looking for traditional funding, due to lower profit margins, and the difficulties in recovering funds if the borrower defaults. If you're one of the many businesses which can't qualify for traditional bank loans, even though you have good credit, Merchant Cash Advance might be the best solution for you to get the working capital you're looking for. Most MCA programs allow you to use funds to pay off vendors and loans, advertise, purchase equipment or inventory, or expand into a new location.
Merchant cash advance companies lend out their money to merchants in return for the merchant’s future credit card sales at a discounted rate. The investor's profits come from taking a percentage of the merchant’s credit card receivables until the merchant has paid back the amount borrowed. Since all payments are automatically taken from every credit card transaction, there is no way for the merchant to incur late fees, and therefore no need to guaranty the loan with collateral. If the merchant’s business slows down, then the merchant simply pays the advance back slower, with no penalties, extra interest, or more punitive sanctions. Another advantage of MCA is that the merchant can usually receive more funding before their current cash advance is paid in full.
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