Merchant Cash Advances: A Temporary Solution or a Long-Term Strategy?

Jason Hunt
November 10, 2023

Over the past decade, the financial landscape for small businesses has seen significant evolution. Traditional bank loans aren’t the sole capital source for entrepreneurs anymore.

The Merchant Cash Advance (MCA) has emerged as a popular alternative. While MCAs offer rapid access to funds, the question remains: are they merely a stopgap, or can they be a part of a long-term plan? Let’s explore.

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What is a Merchant Cash Advance?

A Merchant Cash Advance allows a business to exchange a slice of its future sales for immediate capital. Distinct from conventional loans, repayments are through daily credit card transaction deductions.

This flexibility is particularly beneficial for businesses with variable sales.

The Rising Popularity of MCAs

MCAs have seen a notable surge, particularly among smaller enterprises. From being virtually absent in the early 2000s, the MCA industry touched an annual $10-12 billion by 2020, as cited by the Straw Hecker Group.

Quick access to funds, a straightforward application process, and no collateral requirements drive this expansion.

MCAs as a Temporary Solution

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Emergency Funding

MCAs shine when swift cash is the need of the hour, bypassing the protracted approvals of regular bank loans. A Federal Reserve Bank of New York report indicates MCAs boast a 59% approval rate, contrasting with the 50% for smaller bank loans.

High Approval Rates

MCAs are also a viable solution for businesses with poor credit history. Since the approval of MCAs primarily depends on the business’s daily credit card transactions, many businesses with less-than-stellar credit can still receive funding.

Limitations of MCAs as a Long-Term Strategy

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While MCAs serve as an effective short-term solution, they might not be sustainable in the long run due to their high costs.

High Cost of Capital

MCAs come with higher annual percentage rates (APRs) than traditional loans, sometimes even exceeding 200%. These rates can pose a significant burden on small businesses, reducing their overall profitability.

Cash Flow Disruption

The daily repayment structure of MCAs can potentially disrupt cash flow. During slower business periods, the fixed percentage can constitute a large portion of the daily revenue, creating financial stress.

Strategic Use of MCAs

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Despite the limitations, strategic use of MCAs can indeed form part of a long-term strategy.

Expansion and Growth

Businesses can use MCAs for growth opportunities like opening a new branch, purchasing equipment or launching a new product line. The potential profit from these ventures can outweigh the high cost of the MCA.

Bridging Seasonal Cash Flow Gaps

MCAs can help businesses with seasonal fluctuations manage their cash flow better. For example, a retail business might use an MCA to stock up inventory before the holiday season and pay it back with the increased sales during that period.

Making an Informed Decision

Whether MCAs serve as a temporary solution or a long-term strategy largely depends on the specific needs, circumstances, and financial health of a business. Businesses should weigh the high cost of MCAs against their benefits and consider other financing alternatives.

Understanding the Terms

It’s important for businesses to understand the terms of the MCA fully. This includes the factor rate, holdback amount, and the estimated repayment period.

Consider Alternatives

Businesses should consider alternatives such as term loans, SBA loans, business credit cards, or even crowdfunding. Each of these options has its pros and cons that need to be evaluated.


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While MCAs can effectively address short-term needs or aid businesses with compromised credit, their substantial costs may deter their adoption as a consistent financial strategy.

As with all fiscal choices, MCAs should be deployed judiciously, rooted in the business’s distinct requirements. It’s wise to engage a financial advisor before such pivotal decisions, ensuring the enterprise’s fiscal well-being.

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Jason Hunt

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