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How to Get a Merchant Cash Advance for Your Business

By John Csiszar

A merchant cash advance is a way for companies to raise nearly immediate financing. As the name suggests, a merchant cash advance allows companies to receive money upfront from a lender before cashing in daily or monthly credit and debit card receipts. Rates for this type of funding can be higher than with other sources of funding, as the general rule in financing is that faster cash equates to higher rates.

With a merchant cash advance, everything comes down to your cash flow. If your have enough regular receipts to satisfy a lender, you’re likely to get approved even if your company has poor credit. However, the viability of a merchant cash advance for your business will depend on whether or not you can adequately cover the amount of your advance with your incoming cash flow. If you have sporadic — or nonexistent — sales, a merchant cash advance might not be as appropriate for your business as some other types of financing. Startups in particular might need to seek an alternative source of funding rather than a merchant cash advance.

There are all sorts of reasons why your business might want to generate some immediate cash, from funding purchase orders to financing your daily operations. Here’s an MCA guide that can help you examine how a merchant cash advance might help your company or whether a different type of financing might be a better option for you, based on the nature of your business.

Compare The Best Merchant Cash Advance Loan Options

Type of Borrower Funding Source Funding Type Loan Amount Fees May Include Rates Down Payment Terms Take Action
Startup Specialty Finance Companies (e.g., Seek Business Capital) Startup Loan Up to $500,000 Application fee, origination fee, prepayment fees 0% intro APR for several months; varies thereafter 0%- 25% 0 - 5 years
Companies With Bad Credit Short-Term Lender Merchant Cash Advance Up to a % of incoming account receipts Factor fee, setup fee, processing fee 14% - 20% - plus N/A Monthly, up to 18 months
Companies With Significant Assets Equipment Finance Vendor Merchant Cash Advance / Equipment Finance Loan or Lease Up to FMV of equipment or amount of expected depreciation over life of lease Application fee, origination fee, late payment fee 3% - 7% 0 - 20% Variable; typically up to useful life of equipment
Seasonal Companies Short-Term Lender Merchant Cash Advance Up to a % of incoming account receipts Factor fee, setup fee, processing fee 14% - 20% - plus N/A Monthly, up to 18 months
Companies With Good to Excellent Credit Traditional Banks Merchant Cash Advance / Short-Term Business Loan Variable; may be capped around $100,000 Application fee, origination fee, late payment fee 5% - 25% 5% - 25% 0 -3 years
Companies With 2-3 Years of Financials SBA Loans Merchant Cash Advance / SBA Loan Commonly, $50,000 - $100,000; up to $5 million Packaging fee, guaranty fee Prime + 2.25% or prime + 2.75%; smaller loans may be 1% to 2% higher 5% - 20% Up to 25 years for real estate; typically 5-10 years for general purposes
Businesses With 5+ Years of Consistent Revenue Large Banks Merchant Cash Advance / Line of Credit Up to $5 million+ Application fee, origination fee, maintenance fee, over-the-limit fee, late payment fee Variable; some lenders use Prime + 1.75% N/A As-needed; when drawn, typically 0-3 years

Top 7 Options for Merchant Cash Advance

1. Startups

How to Get a Merchant Cash Advance for Startups

When a company is just starting out, it generally has limited financing options. Traditional banks often won’t give newer companies a second look, since businesses with a limited operating history are riskier from a lender’s perspective. In that case, a merchant cash advance might seem like a good choice, since it doesn’t typically require good credit. However, a true startup won’t yet have reliable incoming sales to sell to a financing company. In most cases, startup businesses have their best shot at good financing through alternative sources of capital, such as Seek Business Capital.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Companies like Seek Business Capital aim to hook up newer or startup businesses with the capital they need to operate and grow. One of the benefits of using this type of specialty financing company is that it can provide business consultants that understand your financing needs and can offer you more flexible solutions. Although a merchant cash advance may not be possible, speaking with a company like Seek Business Capital is a good first step towards understanding the options you may have available.

The reality of being a startup company is that you’re likely going to face higher interest rates no matter which type of financing you secure. That’s not a personal judgment of your company or your business model, it’s just how the dollars and sense of the risk-reward calculation break down. Without a proven ability to earn profits and pay off your debts, it’s harder for lenders to offer you the best available rates.

This doesn’t mean that there’s no hope for your startup company to obtain decent financing, however. Working with alternative financing sources like Seek Business Capital can open up various forms of specialty loans, including a 0% introductory APR on many loans, with a variable rate thereafter.

Beyond the difficulty in getting good interest rates as a startup, it can often be hard to qualify for any loan at all. Most lenders, especially traditional banks, are interested in rising cash flow, profitability and a long operating history before they’ll issue any loans. Thus, startups are behind the eight ball from the start, as those financial characteristics are typically in short supply.

Eligibility for a loan isn’t entirely based on operating history, however. Think about it this way — every company you do business with yourself started from somewhere and no doubt got some funding along the way. Although your path as a startup may be harder, with the right documentation you can likely find a willing lender.

What can help with your quest for funding as a startup is to have a clearly written business plan. A merchant cash advance is usually not an option since your cash flow has yet to begin, but if you can chart out a reasonable path for future profits, you can often work with an alternative funding source to get your needed capital. Once you’ve got your initial funding in place and your business is operational, then you can consider the next step, merchant cash advance.

Of course, a projected plan on paper may still not be enough to qualify you for your first business loan. Especially if you are a sole proprietor, your personal credit history will also likely come into play. Your personal credit history can demonstrate to potential lenders your ability to pay back debts in the past. While that may not be a perfect indicator for the debt-paying ability of your business, it’s an added data point that can only help since your loan application is likely to be thin without it. The higher you can raise your credit score before you apply, the more it will help your cause, so try to clean up your credit report before you go searching for business financing.

One of the advantages of working with a specialized finance company is that they tailor their business to startups and newer companies. A company like Seek Business Capital understands the financial situation you’re likely to be in as a startup and can work around your financial history. However, even with these types of companies, the stronger your finances and credit, the more likely you are to qualify.

In some ways, not being able to qualify for a merchant cash advance as a startup may be a good thing. If you can instead qualify for a general business loan, you’ll have the capital you need to build your business and use as you see fit without having to worry about the cash flow reduction that goes with a merchant cash advance.

With Seek Business Capital, for example, you may qualify for a loan of up to $500,000. Generally, initial loans are funded at a much lower level, but the loan amount you can get will be based on the application you present to your potential lenders. The stronger your financial and credit profile, the more you can qualify for. Remember though that you should never overextend yourself by looking for a loan larger than you will need.

To get any type of financing for your business, you’ll need to provide documentation. As a startup, you won’t have the type of comprehensive financial records that long-established companies may be able to produce, such as years of financial statements and tax returns. However, the more you can provide at this stage, the better. Some of the documents you should have ready for your potential lenders include:

  • Your Social Security number so lenders can run a personal credit check
  • The business plan for your startup, with details as to how your loan will translate into future growth and profitability
  • Your intended use of the loan proceeds

Remember that the types of lenders you’ll be dealing with at this stage won’t be large, traditional banks, so you may have to provide additional documentation or collateral. You can speak with lenders before you file an application so you can better anticipate what you might need to provide in your loan application.

If you run into a few roadblocks along the way, don’t be deterred. There are a number of businesses that cater to startups, and you may find that the path to a loan through one of these alternative sources of finance is easier than you imagine.

Although it can be harder to qualify for startup financing, these types of loans are actually some of the most flexible. Specialized lenders understand that cash flow can be irregular for startups, so sometimes loans can have flexible payback schedules. Longer-term loans carry more risk for lenders, however, so you should anticipate that your startup loan should be shorter-term in nature. If you can successfully pay back your initial startup loan, you can likely qualify for better loan terms with subsequent financing.

2. Companies With Bad Credit

How to Get a Merchant Cash Advance for Companies With Bad Credit

Companies with bad credit can struggle finding traditional financing. By definition, a company with bad credit is a poor risk for a lender. If your company has already missed payments or had other credit difficulties in the past, lenders may shy away from doing business with you, as there are plenty of other less-risky options available. For this and other reasons, a merchant cash advance is often the perfect financing option for companies with bad credit.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

One of the interesting things about a merchant cash advance is that technically, merchant cash advance loans don’t exist. In the strictest terms, a merchant cash advance is a sale — you’re selling a portion of your incoming credit and debit card sales in exchange for money from a lender upfront. When your accounts receivable are paid off, you’ll pay back your cash advance, along with a fee. For many borrowers, the cycle then begins again with the next months’ receipts.

Merchant cash advances typically have higher rates than traditional loans. Part of the reason for this is that merchant cash advances are short-term loans and lenders need to make a profit. Another reason is that unlike with a traditional loan, you generally don’t need good credit or an extensive application to get approved for one. Monthly rates for a merchant cash advance are expressed in terms of factoring fees. MCA factor rates are typically around 1.14 to 1.18, which translates to an interest rate starting around 14 percent or so. Remember, that’s an annualized rate, so on a monthly basis, that means you’ll likely be paying a little over 1 percent. If your monthly receipts are small or irregular, or if customers have a spotty payment history, these factors are likely to push your annual percentage rate up towards the high end of the range.

Eligibility for a merchant cash advance isn’t contingent on your credit history, so it can be an ideal source of funding for a company with bad credit. As long as you can show that you’ve got incoming credit and debit card receipts, you’re likely to qualify for a merchant cash advance. Of course, if you do have a spotless credit history and extensive cash reserves, these factors can only help when it comes to qualifying for a merchant cash advance. However, the primary qualification standard is a demonstrable flow of business.

When you apply for a merchant cash advance, you should take a close look at your anticipated revenue stream. If you apply for funding and you can’t pay it back out of your upcoming income, you’ll be in over your head and you’ll be strangling the cash flow of your business. You should only look to advance a reasonable percentage of your incoming revenue to allow for shortfalls, bad months or other snafus that could mess up the daily operation of your business.

For example, let’s say you anticipate $10,000 in revenue in the upcoming month. If you apply for a $10,000 merchant cash advance, that means you’re committing all of the revenue for the following month to your lender — and you haven’t yet paid any interest or fees.

Your lender will no doubt do its due diligence as well and offer up only an amount you can afford, but this doesn’t relieve you of the responsibility as a business owner to take an honest look at your finances and choose an appropriate amount. If you have any doubts, work with a financial or tax advisor and start small — you can always adjust the amount you advance in the future.

Merchant cash advances are popular because they are fast and they don’t require extensive documentation like a regular loan would. With a merchant cash advance, it’s not your general credit or unsecured promise to pay back the money that lenders rely on — it’s your book of business. If you generate enough regular sales to show that your cash flow can pay back the cash advance, you’re likely to qualify.

The good news is that a merchant cash advance can usually be applied for online. If you’re approved, you can likely get your cash in a matter of days, or sometimes even in a matter of hours. That comes with a cost, in the form of higher interest, but it’s also extremely convenient.

To apply for a merchant cash advance, you’ll usually need at least some of the following documents:

  • Driver’s license
  • Business check (voided)
  • Business tax returns
  • Business accounts receivable statements
  • Credit card processing statement

In some cases, you might also be asked for additional bank statements or even a credit report, but generally your business cash flow will be the important factor.

A merchant cash advance is somewhat like a “pay-as-you-go” system. First, you get the cash advance up front, then your lender takes a slice of your incoming revenue as it’s paid. Technically, you may have a few months to pay back the cash advance, but generally it just gets taken out of your receipts as they arrive. Unlike with a traditional loan, you won’t typically have to put up a down payment or offer up collateral, but you have to pay a fee to establish the lending arrangement.

3. Companies With Significant Assets

How to Get a Merchant Cash Advance for Companies With Significant Assets

Companies with significant assets typically have profitable businesses with regular cash flow, making them excellent candidates for a merchant cash advance. With all that revenue flowing in, merchant cash advance lenders will often compete for a slice of that revenue pie. However, companies in this situation can also often find cheaper alternatives to the high rates of a merchant cash advance. With substantial assets, you can also consider an equipment loan or lease.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

If your business has a lot of equipment, it usually means that you regularly buy new equipment as you expand and that you need to buy replacement equipment on a regular basis as well. Rather than taking a huge chunk of your cash flow to pay off that equipment in full, you can take out an equipment loan or lease to pay for it. This way, the cash flow of your business is maintained but you still get your needed equipment. Although you can also use a merchant cash advance to accomplish the same thing, your rates will be much higher and you won’t be leveraging your power as an asset holder.

One of the major advantages an equipment loan or lease can have over a merchant cash advance is that your rates are likely to be much lower. Although you’ll probably need to do a bit more paperwork to get an equipment loan, that effort will be paid back with rates that can range from roughly 3 percent to 7 percent. Equipment loan rates are usually lower than both merchant cash advances and unsecured loans because you’re using the equipment itself as collateral.

Equipment loans can be easier to get than traditional loans because of the collateral of the equipment itself. Even companies with low-to-middling credit can often get approved for an equipment loan because the loan value is secured by the underlying asset. If you can cough up a larger down payment, you’re even more likely to get approved.

That being said, if you’re really in need of immediate cash, a merchant cash advance can be an even quicker route. Merchant cash advance applications are usually online and funded within days or hours. With an equipment loan, you’ll still likely have to provide company financial records, along with all the details of the equipment you’re financing.

When taking out an equipment financing loan, your loan is limited by the value of what you’re financing. Some lenders may allow you to borrow up to 100 percent of the value of your collateral, although you may get lower rates or faster approval if you finance a lesser amount. This is somewhat similar to a merchant cash advance, in which you can finance up to the amount of your incoming cash flow.

If you are looking to finance the full value of your equipment, you’re more likely to get it if your company has a high level of cash reserves and a good credit history. In some cases, you may even be able to finance for more than the value of your equipment, but that would take top-tier credit and may not always be the most prudent course of action for your business.

To get an equipment loan, you won’t typically need all the documentation that would be asked of you if you were applying for an unsecured loan. As long as your loan is tied to your collateral, you’re reducing the risk for your lender, who can just repossess your equipment if you default. However, just because you have collateral doesn’t mean that you won’t need to provide additional financial records. As with any loan, the more that you can demonstrate the financial strength of your company, the more likely you are to get approved, and at favorable terms.

Documents you should expect to provide include:

  • Personal and business bank statements
  • Business and personal tax returns
  • Business profit and loss statements
  • Proof of ownership of your equipment/collateral

While the main determination for your equipment loan will be the safety and value of your collateral, if you can show that you can pay back your loan even if you didn’t have the collateral, you’ll find yourself in better stead with your lender.

If you’re going the merchant cash advance route, you’ll need the same type of documentation; just think of your incoming receipts as the form of collateral for your financing.

Equipment loans are typically tailored to the useful life of the collateralized assets. For example, if you buy a computer with a useful life of three years, you can likely get financing for three years. This is in contrast with a merchant cash advance, which often runs on a month-to-month basis, with the longest payback periods typically extending just a few months.

4. Seasonal Companies

How to Get a Merchant Cash Advance for Seasonal Companies

A seasonal company is another type of business that is tailor-made for a merchant cash advance. By definition, a seasonal company has periods where it makes few sales, if any. During these lean times, when sales are down, having an outstanding traditional loan that requires regular payments can be unfeasible. A merchant cash advance, on the other hand, can be turned on or off as seasonal cash flow dictates.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A merchant cash advance is forward payment on money you haven’t yet received. A lender will buy the rights to a percentage of your future incoming credit and debit card sales in exchange for money up front. When your next months’ payments come in, you can pay off the cash advance and typically begin the cycle once again.

With a merchant cash advance, you can expect to pay a higher rate than if you took out a traditional loan. Part of the reason for this is the speed involved. Generally, the faster you need money, the more it’s going to cost you, and a merchant cash advance can often be funded overnight, if not within a couple of days. Thus, you’ll often see rates in the range of 15 percent-plus with a merchant cash advance. This type of financing is calculated on a monthly basis using factors, so you might get a quote of “1.15,” for example. This equates to a 15% annual rate. Various factors can push or pull your rate up to the bottom or top end of a range from about 14 percent to 20 percent or even more.

If you’ve got regular credit and debit card purchases running through your business, you can likely qualify for a merchant cash advance. Unlike with many other types of loans, approval for a merchant cash advance isn’t usually based on your credit history, but rather your ongoing sales flow. Of course, with good credit, you might be able to qualify for a lower rate on your MCA.

When applying for a merchant cash advance, think of your future revenue stream as your collateral. In exchange for the cash you’re receiving up front, your lender will automatically take out a portion of your incoming receipts. Thus, you can receive a merchant cash advance up to a certain percentage of your future anticipated sales. This amount may be based on your historical average, or it may be based on actual documentation of your upcoming receipts.

An important thing to remember when calculating how much you want as an advance is that your cash flow will be reduced by the amount of your payback. If you borrow too much in the form or a merchant cash advance, your next month’s cash flow could be reduced to the point that you can’t operate your business. Thus, it’s important to keep both current and future cash flows in mind when you determine how large of a merchant cash advance you would like.

One of the prime benefits of a merchant cash advance is that the application and funding process is fast. You won’t have to worry about providing reams of information that a loan underwriter must spend days or weeks reviewing because your collateral comes in the form of your cash flow.

You can usually apply for a merchant cash advance online, without ever having to visit a loan officer in person. Cash funding can come in a matter of hours or a day or two. This type of rapid funding is more expensive, but you’re paying for the convenience of the process.

Although you won’t need full documentation to get a merchant cash advance, you will need to do some paperwork. Expect to provide these types of documents when you apply:

  • Personal and/or corporate identification
  • A voided business check
  • Tax returns of your business, and perhaps personal ones as well
  • Cash flow statements or proof of past and future accounts receivable
  • Credit card processing statement

Some lenders may still ask you for a credit report, but it’s not typically the most important factor when applying for a merchant cash advance.

A merchant cash advance isn’t like a typical loan with regular payments until a maturity date. MCAs often last just for one month at a time, with the cash advance being paid back by the following month’s receipts. In some cases, you can have a few months up until just over a year to pay back a cash advance, but it’s usually better to pay it off as soon as possible, due to the high interest rates involved.

5. Companies With Good to Excellent Credit

How to Get a Merchant Cash Advance for Companies With Good to Excellent Credit

For companies with good-to-excellent credit, financing is usually easy to come by. For finance companies, the ability to lend out money with a near-certainty of getting it back is a dream scenario. Since companies with upper-tier credit generally have a long track record of regular sales, getting a merchant cash advance will be no problem. Depending on the needs of your business, however, a traditional short-term business loan may also be a good option.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

With a merchant cash advance, a lender gives you immediate money in exchange for a portion of the debit and credit card sales you are going to ring up in your next sales period. It’s somewhat akin to taking out a cash advance on your credit card and then paying it back once you receive the proceeds of your next sales. You’ll be charged interest on a merchant cash advance, often times in addition to a fee. You can repeat this cycle for as long or as short as you would like.

This differs from a traditional short-term loan, in which you borrow a lump sum of cash and pay it back every month in a regular fashion — plus interest — until a specified maturity date.

The downside of a merchant cash advance is that the interest rates are typically much higher than with traditional loans, particularly for businesses with good credit. The rates on a merchant cash advance aren’t based on your credit profile, so in this case, having good credit may not help you as much as it would with a traditional short-term loan.

Rates for a merchant cash advance typically run in the 15 percent-plus range, although it’s important to note that these rates are typically charged on a monthly basis, not an annual one. Thus, you might face a monthly merchant cash advance rate of a bit over 1 percent.

With good credit, a short-term business loan, on the other hand, might only run you 5 percent to 7 percent or so on an annual basis.

One of the bright spots of a merchant cash advance is that you don’t need a spotless credit history to qualify for one. You only need proof of ongoing sales. Of course, if your business does have good credit, this might seem to be a con rather than a pro. While you can use your good credit rating to leverage lower rates on a traditional business loan, your good credit won’t be the primary determinant in your qualification for a merchant cash advance.

That being said, it’s good to have options, and as a business with good credit, it likely means that make regular sales and have a profitable business. This means you’re likely to qualify for either a merchant cash advance or a traditional short-term business loan.

A merchant cash advance is usually limited to a percentage of your regular incoming sales. For example, if you generally bring in $20,000 per month in sales, you’re not going to qualify for a $50,000 merchant cash advance — nor should you want one. However, you could easily qualify for a $10,000 merchant cash advance in most cases.

You should never overextend yourself when it comes to credit, and that applies to both merchant cash advances and traditional loans equally. If you’re committing the vast bulk of your incoming revenue to paying back your outstanding liabilities, you’ll never get ahead of the game as a business. Choking your cash flow could result in less profits for your business in the long run, so you’ll have to balance out the amount you request with your actual revenues, allowing for a healthy safety margin.

Typically, your lender is on your side in this type of arrangement. If you take on more than you can chew, your lender is less likely to get its money back as well, so it’s in everyone’s best interest to finance an appropriate amount only, and no more. You can also consult with a tax or financial advisor to help you determine how much you should request.

Another benefit of a merchant cash advance is that it doesn’t require the sometimes extensive paperwork that a traditional business loan might. Since qualifying for a merchant cash advance depends on your incoming sales rather than your historical credit, documenting your cash flow is the most important step in the application process. With a traditional loan, you’re likely to need years of credit history and business profit-and-loss statements to get through the process.

You can also usually apply for a merchant cash advance online, and funding can be nearly immediate, usually in less than 48 hours. Traditional loans can take days or even weeks to get funded. You’ll end up paying higher interest with a merchant cash advance, but the tradeoff comes in the convenience.

To apply for a merchant cash advance, expect to provide some or all of these documents:

  • A voided business check
  • Business tax returns
  • Your driver’s license
  • Accounts receivable statements for your business
  • Credit card processing statements

Additional bank statements may be required by some lenders, but proof of regular cash flow is the essential underlying element.

Payback terms are one of the biggest differentiators between a merchant cash advance and a traditional loan. With a merchant cash advance, you’re typically rolling over your payouts from month to month; you’ll receive your cash advance first, then as you receive your incoming payments, your lender will automatically deduct what they’re owed, with the process continuing the following month. Merchant cash advances can have terms of a few months or so, but for most businesses, MCAs are paid off as incoming receipts come due.

With a traditional loan, you’ll have to make regular payments to your lender every month, no matter what your receipts are. After a specified term of months or years, you’ll have the loan paid off in full.

6. Companies With 2-3 Years of Financials

How to Get a Merchant Cash Advance for Companies With 2-3 Years of Financials

Once you’ve passed the startup phase and have begun generating some regular business, you’ve proven that your original business concept is viable. You may not be raking in cash — or even consistently profitable — but at least you can demonstrate to lenders that your business is a survivor and that you have some experience as an owner in managing your cash flows. This can make lenders more willing to offer you traditional loans. A merchant cash advance can be an option, but your cash flow may still be irregular, which could make that type of financing a bit riskier for you as a business. At this stage of the game, if you find yourself in need of capital — as most businesses do — your best choice may be an SBA business loan.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

The Small Business Administration exists for the sole purpose of assisting smaller companies with survival, expansion and education. Part of this mandate is to help companies with their financing options. What comes as a surprise to some businesses is that the SBA itself doesn’t actually provide loans to companies. Rather, it acts as an intermediary between lenders and businesses. To that end, the SBA guarantees up to 85 percent of a loan’s value, protecting creditors in the event a company defaults on a loan. This entices lenders to participate in the program, as it makes it even more likely that they’ll get paid back. The SBA can make this guarantee at least in part because it doesn’t generally work with startups. This puts businesses with two-to-three years of experience in the sweet spot when it comes to the SBA loan program.

Unlike with some traditional lenders, the maximum loan rates in the SBA loan program are quite specific, and listed in black-and-white. Here are the current terms:

Loans Less Than 7 Years
$0 - $25,000 Prime + 4.25%
$25,001 - $50,000 Prime + 3.25%
$50,001+ Prime + 2.25%
Loans 7 Years or Longer
$0 - $25,000 Prime + 4.75%
$25,001 - $50,000 Prime + 3.75%
$50,001+ Prime + 2.75%

These rates are generally considerably lower than what you might find if you take out a merchant cash advance instead.

Just because the SBA has a loan guarantee program doesn’t mean that lenders will automatically finance you. You’ll still have to qualify for these loans just as if you went directly to the banks themselves. Additionally, you must meet the minimum qualifications for an SBA loan, as published on the SBA’s website. Broadly speaking, you must meet the definition of a “small business,” you must demonstrate a sound business purpose, and you must show the ability to pay back your loan.

Other published requirements are that you must have invested your own equity in the business and you must have exhausted other financing options, meaning you can’t find another lender willing to loan you money. These requirements aren’t usually hard to meet for businesses in the two-to-five year window, as they are typically managed by owner-investors or sole proprietors and they often still have trouble qualifying for their own financing.

In terms of what makes a “small” business, the SBA publishes a 49-page document outlining all of the specifics, which vary from industry to industry. The SBA defines a small business by either its number of employees or its annual revenue. Generally speaking, a business with $1 million or less in annual revenue is considered a small business. However, this limit can jump as high as $41.5 million for certain larger industries. In terms of number of employees, businesses with between 100 and 1,500 employees are considered “small,” depending on the industry.

The SBA advertises that it offers loans from $500 to $5.5 million. Before your eyes light up at that multi-million dollar upper limit, remember that most small businesses don’t need anywhere near that amount of funding — nor would they qualify. You should always try to take out the absolute minimum amount of financing that you realistically need to fund your business operations. Anything above that is a financial drain, as you’ll be paying interest on whatever you borrow. The extra hit to your cash flow from paying additional interest costs could be enough to grind your business to a halt, so make sure to balance out your cash flow needs so you don’t overextend yourself.

When you apply for an SBA loan you’ll need to provide documentation that you meet the basic requirements of being a for-profit business and that you have good character, management, credit, and the ability to repay. Since the SBA is guaranteeing a good portion of your loan, you’ll need to demonstrate in great detail how you’ll manage to pay your loan back. Thus, SBA loan documentation requirements include the following:

  • Borrower information form
  • Personal background and financial statement
  • Business financial statement
  • Business certificate/license
  • Loan application history
  • Income tax returns for the last three years
  • Resumes for each principal
  • Business overview and history
  • Business lease

Additional documents may be required, particularly if you are purchasing an existing business.

Of course, the more information you can provide about how your company is financially viable, the more likely you will be approved. Think of an SBA loan as having two layers of qualification — you’ll need to satisfy both the SBA and your actual lender, so be prepared to provide as complete a picture of your corporate finances as possible.

You can borrow through the SBA loan program for as long as 25 years, but only if you’re taking out a real estate loan. For typical SBA loans, maturities run up to five-to-10 years. Remember that for SBA loans of seven years or longer, you’ll be paying an additional interest rate premium of 0.50 percent.

7. Established Companies With 5+ Years of Consistent Revenue

How to Get a Merchant Cash Advance for Established Companies

If you’ve been running your business for a long time and have at least five years of consistent revenue, congratulations! Your business is essentially the gold standard in the eyes of potential lenders. With a proven ability to repay your loans and generate cash flow, it’s highly likely that you’ll meet your future credit obligations. Thus, a merchant cash advance will be just one of the financing options you’ll have access to — and it may not be the best one, due to the high interest rate charged. In many instances, a standard line of credit from a large bank can be a better choice.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A line of credit is essentially a pool of capital that can be drawn upon at a moment’s notice. Generally, you won’t have to pay interest on a line of credit until you take physical receipt of the cash, but you may have to pay a fee to initiate or maintain it. Rates for this type of credit can be quite low, since large lines of credit are typically only extended to companies with top-tier credit profiles.

The time to set up a business line of credit is when things are running smoothly. This is because it can take some time to go through the application process to actually set up your initial line of credit. If you haven’t yet set up a line of credit and you find yourself in a cash crunch, you can’t generally just walk into a major bank and get immediate financing. If you really need financing immediately, a merchant cash advance might still be your best option, since you can apply online and get approval rapidly, with funding coming in a matter of a few hours in some cases, or a few days at the latest.

As a long-established, successful business, you can expect and should demand the absolute best rates available in the market. Whereas newer companies or those with middling credit could pay in the double digits for a line of credit — if they could even get approved — you can expect to pay about prime rate + 1.75 percent as a top-tier business in today’s credit environment. With negotiation, large cash reserves or other positive credit factors, you may be able to go even lower than that. Since you’ve earned your success by working hard for it, don’t be afraid to use it — shop around for the best possible rates, and negotiate for even better ones.

As a well-run, established business, you should expect to hear “yes” when you apply for nearly any type of business loan, including a credit line. Depending on how large of a credit line you’d like, you may have to spend more time negotiating or providing additional documentation, perhaps even collateral. However, approval for the line itself shouldn’t be an issue. If you can’t get as much as you want, feel free to shop around until you find a lender willing to work with you.

The size of your credit line will likely be based purely on your company’s finances. For example, if you only generated $1 million in revenue last year, asking for a $20 million credit line isn’t likely to pass muster. Your lender will consider a number of factors in deciding the size of your credit line, from your loan-paying history to your cash flow and the intended use of your credit line. For large, multi-million dollar companies, however, a maximum line of credit in the neighborhood of $5 million or more isn’t too uncommon.

As with any type of loan, however, just because you can get it doesn’t mean you should. The size of your credit line isn’t a point of competition, it’s a financial choice for your company. Imagine, for example, that you see a need for a $50,000 credit line but you’re granted one for $500,000. If you’re not disciplined, you may envision using that entire credit line to fund a major business expansion, buying new equipment, hiring new employees and getting a corporate jet. However, if you end up spending that money on things your business doesn’t need, that it can’t afford or that don’t generate revenue, you may find yourself in a financial hole that you can’t climb your way out of. Always think of borrowing in terms of what you might actually need and what you can realistically pay back.

Even as an ideal customers in the credit world, even established businesses should expect to spend some time with a line of credit application. Part of the reason is that lines of credit often involve significant amounts of money. If you intend to have a major bank stand at the ready with $1 million whenever you want it, you should expect that you’ll have to prove to them that you’re a good credit risk. In most cases, you won’t be able to fill out this type of application online; you’ll need to speak face-to-face with a loan officer.

This is the only area where a business line of credit comes up short compared with a merchant cash advance. In most cases, your funding process will take much longer if you’re going the line of credit route rather than the merchant cash advance route. This is because a merchant cash advance is typically self-financed; you receive your money, and then your lender automatically takes a slice of your incoming credits. With a line of credit, you’re essentially just promising the bank that you’ll pay that money back, without offering direct access to any of your assets or incoming receipts. For this reason, you’ll generally have to provide a lot of documentation so that your lenders grasp your entire financial situation.

As much as your lender might want to take your word that you’re a good credit risk, it’s not going to offer you a line of credit without written documentation. Requirements are often unique to each individual lender, but typical paperwork you should expect to provide with your application includes the following:

  • Business tax returns
  • Business bank statements
  • Business profit and loss statement
  • Business net worth statement
  • Business balance sheet
  • Business cash flow statement

The more documentation you can provide that shows what a low credit risk you are, the more likely you are to receive a generous credit line with favorable terms. Talk to your financial advisor, tax advisor and/or the lender itself to determine what documents can portray your financial situation in the best overall light.

Terms of a business credit line are often established by individual lenders. Unlike with a traditional loan, however, there are no payback requirements until you actually draw on your credit line; merely establishing the line doesn’t require any payments, with the possible exceptions of startup or maintenance fees. Once you actually draw from your credit line, your repayment terms will begin. These can be as short as a few months to as long as a few years. Of course, the quicker you pay back what you have borrowed, the less you’ll have to pay in overall interest expense.

FAQs About Merchant Cash Advance

Since there are so many variations of merchant cash advance, it’s important to know what your options are and how the whole process works. Here’s a look at some of the most common questions regarding merchant cash advance, credit and corporate finance.

What Is a Merchant Cash Advance?

A merchant cash advance is a way for businesses to get upfront cash in exchange for selling future income. In other words, in a merchant cash advance, a lender will buy the rights to incoming credit and debit card sales in exchange for providing a business with upfront cash. This is a way for businesses to get early access to their cash flow.

How Long Is a Merchant Cash Advance?

Merchant cash advances are often paid off on a monthly basis as receipts come in. However, a merchant cash advance can be structured so that it is paid off over a matter of a few months instead, perhaps as long as 18 months. In that case, a smaller percentage of receipts may be taken out on a monthly basis as payment for the cash advance.

How Do Merchant Cash Advances Work?

With a merchant cash advance, the first step is the payment from the lender to the business. Next, a certain, agreed-upon percentage of sales are docked by the lender as they are paid off. This money goes to satisfy the original balance, interest and total fees that are associated with the cash advance. Unlike with other financing types, such as invoice factoring, with a business cash advance you’ll have to set up credit card processing so that a portion of your sales receipts actually go directly to your finance company.

As an example, let’s say your business has a short-term need for $20,000. You might agree to a merchant cash advance arrangement in which you take the $20,000 up front in exchange for 25 percent of your incoming sales to be diverted to your lender. If you make $40,000 in sales over the following month, $10,000 will go towards satisfying your merchant cash advance obligations. You’ll still be on the hook for the remaining $10,000, plus interest and fees. Over time, your sales will eventually pay off the total advance.

Is Merchant Cash Advance Legal?

A merchant cash advance is not only legal, it’s a fairly common way for companies to finance their short-term needs. One thing to note, however, is that a merchant cash advance isn’t technically a loan. What this means is that companies offering a merchant cash advance don’t have to comply with usury laws, which limit the amount of interest that a lender can charge on a loan. Thus, make sure to read the fine print on your merchant cash advance agreement before you finalize the details. Legally, your financier doesn’t need to limit the interest rate that’s charged, so the responsibility is on you to ensure you aren’t being taken advantage of with an astronomical interest rate.

Merchant Cash Advance APR

As noted above, there are theoretically no limits as to how much a finance company can charge on a merchant cash advance, so the sky truly is the limit. However, although MCAs usually are much more expensive than traditional loans, rates on an annualized basis are generally in the mid- to high-teens.

Merchant Cash Advance Pros and Cons

A merchant cash advance has both pros and cons, much like most financial transactions. The bottom line is that a merchant cash advance can be good overall if it meets your financial needs, but it can be expensive if you have other options. Here’s an overview of MCA pros and cons:

Pros

  • Easy qualification standards
  • Rapid funding

Cons

  • High fees
  • Finance company has direct access to your incoming funds

The bottom line is that a merchant cash advance can be an expensive way to get your near-term funding, but it’s the ultimate in convenience. It doesn’t take much to qualify — at least compared with a traditional loan — and you can usually have your funding within a day or even less. However, you’ll have to trade off that convenience with the high interest rates and fees associated with MCAs; you’ll also have to assign direct control over your incoming cash flow to your finance company.

What Happens if You Don’t Pay a Merchant Cash Advance?

If you don’t pay your merchant cash advance, the business and personal ramifications can be enormous. Just like with a traditional loan, if you don’t pay back your MCA, your finance company will likely sue you. In most cases, this will lead to a judgment being entered against you, forcing you legally to pay back what you owe. If you were required to sign a personal guarantee when you agreed to a merchant cash advance, you’ll also be on the hook personally for the money. Your finance company could garnish your wages or seize your assets to satisfy your debt, and you may be forced into bankruptcy. For these reasons alone, it’s imperative that you fully understand your merchant cash advance obligations before you agree to accepting one.

How Do I Choose a Merchant Cash Advance Lender?

Since taking out a merchant cash advance can be an expensive operation, you’ll naturally want to gravitate towards finance companies that offer you the lowest overall rate. But even though rates and fees are critical parts of the equation, you don’t want to sign a deal with the first lender you see offering a low rate. Shop around and get a feel for what the competitive landscape looks like. Ask your lender questions, and do some research as to the trustworthiness and reliability of your potential finance partner. You’ll want to work with a company that has excellent customer service so that you don’t get hung out to dry if something goes wrong, and you don’t want to work with a company that doesn’t have experience working with your type of business. At the end of the day, realize that even though merchant cash advances can be short-term in nature, you want to work with a partner that you’re comfortable with for the long haul, both in terms of costs and in terms of service and expertise.

How Can I Get a Better Interest Rate on My Merchant Cash Advance?

Merchant cash advances are offered based on your cash flow and visible revenue, not on your credit history. Thus, your ongoing revenue is more important to your interest rate than your credit score. If you’re an established company with guaranteed, recurring revenue, you can likely score a better MCA rate than if you’re a newer company with sporadic cash flows. Over time, if you can build up your business to the point where it has predictable streams of revenue, you can likely get better MCA offers.

What Are Some of the Risks Involved in Merchant Cash Advance?

All financial transactions involve at least some level of risk. With a merchant cash advance, for example, you’re promising to pay back money that you haven’t yet earned. If for some reason your business dries up the day after you take out a merchant cash advance, you might end up defaulting. This could not only hamper your future efforts to raise capital, it could actually drive you out of business.

Another risk is that you’re dealing with an unscrupulous finance company. Since merchant cash advances aren’t covered by usury laws or general federal oversight, you may be charged an interest rate of 40 percent or even more. Finance companies are great at hiding the actual rate you’ll pay for your money, especially with cash advances, where the interest rate is cloaked as a “factor rate” rather than an interest rate. You should likely have your financial or tax advisor — or an attorney — look over any merchant cash advance arrangement you set up for your business.