A Quick Answer
A merchant cash advance (MCA), sometimes called revenue-based financing, is a type of financing for small businesses and eCommerce businesses with a unique qualification and repayment process primarily determined by revenue generated rather than traditional loan qualifying metrics. An MCA provides working capital in the form of a lump sum payment that can help businesses manage cash flow effectively and cover various business needs.
What is the difference between a Merchant Cash Advance and a Traditional Bank Loan?
Before getting into the differences, note that MCAs and traditional business loans are both still loans where you’ll receive funds from a bank, and you will have to repay that amount with an added fee over time. However, MCAs stand out as a short-term financing option designed to help small businesses with immediate cash flow needs.
The main differences between a traditional business loan and a merchant cash advance come from both the qualification process and the way repayment is done.
Qualification
For traditional bank loans, getting funding will require a business owner to meet different kinds of criteria in order to qualify and gain eligibility.
Qualifying metrics include things like personal credit score, business credit score, years in business, yearly revenue (with consistent revenue for the past 3 years), business plan, loan proposal, and potentially more. The application process can be lengthy, making it difficult for small businesses to secure funding quickly.
Beyond these many targets a business owner must hit, traditional business loans are more suited for traditional businesses.
Newer types of businesses, namely eCommerce businesses, are much harder for traditional banks to assess.
Because of this, it often happens that traditional banks will not even entertain a loan for an eCommerce business, even if that business meets all of the qualifying criteria.
By contrast, a merchant cash advance (MCA) will look at different business metrics just as a traditional business loan, but will often use the revenue generated by the business as its main qualifying metric.
Through the use of technology, the lender for an MCA can typically hook into the backend of whatever platform an eCommerce merchant sells on and assess the health of their business to assist in assessing risk. Additionally, the approval process for an MCA is much quicker, allowing small businesses to access funds rapidly without waiting weeks or months.
In turn, this makes for a much simpler qualification process that is also typically much faster than a traditional bank loan.
Repayment
Traditional loans have very familiar repayment terms that most people are familiar with.
When you are loaned money for a traditional loan, you have a repayment schedule (for businesses, this is typically 1-3 years), and your fee is based on interest, typically measured using APR and an interest rate.
With that in mind, you will receive funds, and starting 30 days after receiving them, will have to pay back your loan in 12 installments broken out into 12 even minimum payments.
When you finally pay off your loan, you will have paid back the principal amount and whatever interest rate applied to your loan.
Merchant cash advances (MCA), once again, are focused on the revenue a business generates and use that revenue to set the repayment schedule and minimum payments.
When you receive an MCA, repayment schedules are typically much shorter than traditional loans, ranging typically between 1 month and 6 months. This short-term financing option is ideal for businesses needing quick access to capital.
For repayment, MCAs differ from traditional business loans in that minimum payments can rise and fall based on the revenue generated by a business.
That means if you have a slow sales month, your minimum payment will be reduced, and when sales pick back up, your minimum payment will increase accordingly.
This method of repayment is beneficial to businesses and lenders, as sales for eCommerce businesses can easily rise and fall based on factors like seasonality and temporary stock-outs, and adjusting the minimum payment based on this ensures a more guaranteed payback.
Additionally, MCAs do not use an interest rate like traditional loans. Instead, they use a factor rate to determine the total repayment amount. The factor rate is a fixed cost multiplier applied to the lump sum amount received, making it a different structure from traditional interest-based loans.
Where to Obtain a Merchant Cash Advance (MCA)
There are several ways to get a merchant cash advance (MCA) all over the internet.
Since you’re reading this right now, the fastest way to get a merchant cash advance (MCA) would be to use this site, Onramp Funds, to get an offer and qualify for an MCA.
When you sign up, you can choose from whatever platform you sell on, connect your bank account to Onramp, and receive a funding offer within 24 hours. The advance amount you qualify for is based on your business's revenue, providing a financing option that aligns with your sales performance.
How a Merchant Cash Advance (MCA) Can Help Cash Flow for Small Business Owners
Managing cash flow is one of the biggest challenges for small business owners, especially in the fast-paced world of eCommerce. A merchant cash advance (MCA) can provide a reliable solution by offering a lump sum of working capital to help businesses cover immediate expenses, stock up on inventory, or invest in growth opportunities. Unlike traditional business loans, MCAs provide flexible repayment structures based on revenue, which means that borrowers don't have to worry about fixed monthly payments. This type of business financing ensures that repayment aligns with business performance, allowing for better cash flow management and reducing financial strain during slow sales periods.
How a Merchant Cash Advance (MCA) Can Help Your Cash Flow for Business Owners
Managing cash flow is one of the biggest challenges for small business owners, especially in the fast-paced world of eCommerce. A merchant cash advance (MCA) can provide a reliable solution by offering a lump sum of business funding to help cover immediate expenses, stock up on inventory, or invest in growth opportunities. Unlike small business loans, which typically require a lengthy approval process and a strong credit history, MCAs offer a faster and more flexible funding option that aligns with a business's daily revenue.
Advantages of Merchant Cash Advances (MCA)
One of the biggest advantages of an MCA is that repayment is directly tied to credit card sales or overall revenue, meaning businesses don't have to worry about fixed monthly payments like those required with a traditional business line of credit. This form of alternative financing is ideal for businesses with fluctuating sales, as it ensures that repayment amounts adjust in proportion to revenue, easing financial strain during slower months.
For businesses that may not qualify for lines of credit or small business loans due to bad credit or limited financial history, MCAs provide a more accessible path to business cash advance solutions. Many MCA providers do not require a strict credit check or extensive bank statements, focusing instead on recent sales performance. This leads to higher approval rates, making it an attractive alternative for businesses that need quick access to capital.
Additionally, MCAs offer an alternative to traditional lines of credit without the burden of a fixed annual percentage rate (APR). Instead, repayment is structured as a percentage of revenue, typically deducted directly from a business bank account or from daily credit card sales, ensuring businesses can manage their cash flow more effectively.
While an MCA can be a great funding option, it's important for business owners to compare different MCA providers and understand the terms before committing. Whether you're looking for a business cash advance to cover short-term expenses or seeking an alternative to traditional small business loans, an MCA can be a valuable tool for maintaining and growing your business.
Conclusion
With this simple guide, you now know what a merchant cash advance (MCA) is, how it differs from a traditional loan, and where to obtain one through various merchant cash advance providers.
MCAs are more tuned to how eCommerce businesses work, and when utilized can help a business grow much faster than without a funding source, and help prevent business downfalls like stockouts. By improving cash flow and providing quick working capital, MCAs ensure that small businesses can continue operations smoothly without disruptions.
So if you’re interested in a merchant cash advance (MCA), get an offer from Onramp and start growing your business today!
