What is a merchant cash advance?

Merchant cash advances are loans or lines of credit based on future credit or debit card sales. Merchant Cash Advance providers invest their own money to pay small businesses the majority of what they earn immediately after a transaction has occurred. This can be an excellent alternative to bank financing for small business owners who don't want the hassle and long wait times involved with obtaining a bank loan.

Merchant cash advance providers will send a check for between 50% and 70% of the total sales you have made on a particular day. This amount is based on your average daily credit or debit card sales, which is established through their software. You can expect to receive the check in the mail, with most merchant cash advance providers favoring paper checks to electronic transfers.

Before you can receive your funds, you will be required to sign a promissory note that details how your merchant cash advance will work. You can expect to pay an origination fee for borrowing this money (usually between 10% and 15%), in addition to what are known as "rolling reserves." With rolling reserve programs, you pay an interest percentage of the total sales for between two and twelve months. You can expect your merchant cash advance provider to hold anywhere between 50% and 100% of the money you make after this time has passed, depending on how long you sign up for and how much you borrow.

The biggest difference in comparison to a bank loan is that in most cases, there isn't any collateral involved. The only way your merchant cash advance provider will be repaid is through future credit or debit card sales at your business — something that is usually out of your hands.

The other key difference with merchant cash advances is the speed at which you will receive funds. It can take as few as two days for a provider to give you money after it receives future credit or debit card sales from your business, making this an attractive option if you need access to capital right away.

One of the biggest mistakes business owners make is choosing a merchant cash advance provider based on which one offers them the highest percentage. While it may seem like there couldn't possibly be any downsides to getting up to 100% of future sales, this actually isn't in your best interest.

The higher percentage of sales your merchant cash advance provider is going to get, the more risk they are taking on by lending you money. This means that if you aren't able to pay them back from future credit or debit card sales, you will have to make up for this shortfall in some way. With percentages above 70%, this could include rolling reserves, which require you to pay them back with your future sales for anywhere from two months to a year.

If you need immediate access to capital it can be worth paying more in origination fees if this means that your merchant cash advance provider is less likely to hold onto your money. Look at the terms of each individual offer and determine which one you think would be best for your business.

The biggest difference between a merchant cash advance and any other form of financing is that the money is almost always available immediately upon the completion of transactions at your business, as opposed to bank loans or lines of credit.

Paying back your merchant cash advance is unique in that you repay the money you owe based on future sales at your business, rather than monthly installments. This means that if you borrow $5,000 for a two-month rolling reserve term, you could expect to receive anywhere between 25% and 100% of your sales as a repayment.

In most cases, banks will only give you enough money to cover certain expenses for your business. A merchant cash advance provider has the ability to give you the full amount of large credit card transactions, making them ideal if you have a sudden influx of customers or a seasonal boost in sales during a specific time of year.

The number-one requirement is that you must be able to accept credit or debit card payments at your business. If you do not currently have this capability, it is something that will need to be set up before applying. There also needs to be an existing relationship between you and your business and the merchant cash advance provider.