Accounting and Finance, Credit Card Processing

Should You Get a Merchant Cash Advance?

by Ben Dwyer

When you need money for your small business, it may be tempting to take a merchant cash advance, or an advance of money against your future credit card sales. Your credit card processing company (or other cash advance provider) will deposit money into your bank account, which you will then pay back through daily automatic deductions from your credit card sales.

Many processors now offer cash advances, and popular platform Square is making the process easier than ever by including information on their cash advance program, Square Capital, right in an eligible business’s processing dashboard.

But are cash advances worth the costs? Primarily because of hefty fees, it may be worth it to look for funding from other sources first.


What are merchant cash advances?

A merchant cash advance is a form of funding available to businesses. You’ll get a lump sum of money “secured” against your future credit card sales. Essentially you’re selling a percentage of your credit card sales to your processor or merchant cash advance provider.

What can merchant cash advances be used for?

Like business loans, cash advances can be used for a variety of business expenses, including advertising and marketing, purchasing inventory, expanding or renovating, purchasing equipment, and more. Merchant cash advances, like those available from Square Capital and other processors, provide working capital for cash-strapped businesses.

Pros of Merchant Cash Advances

While merchant cash advances are often expensive options when seeking working capital, there are some limited benefits to them, mostly in terms of speed of funding and eligibility requirements.

Relaxed Eligibility

Merchant cash advances generally don’t require good personal credit, meaning they’re available to more businesses. Strong credit card sales are a bigger component of approval for an advance. Some options, like Square Capital, display eligibility right in your processing dashboard.

If you have less-than-perfect personal credit but strong credit card sales, it may be easier to obtain a merchant cash advance than a traditional business loan.

Faster Application and Funding

Cash advances are usually processed much faster than traditional loans, giving quicker access to funds. Some companies boast a 7-10 day turnaround from application to funds deposit. However, it’s worth asking yourself why the process is so quick. It may be that servicers are hurrying you into an agreement with terms that benefit them, not you.

However, if it’s critical that you get access to cash sooner, a merchant cash advance is typically going to provide that faster than traditional loans.

No Collateral Required

Unlike some small business loans, getting a merchant cash advance doesn’t require personal collateral to secure the funding. You won’t be putting your own assets at risk.

Unfortunately, that’s where the pros end.

Cons of Merchant Cash Advances

By far the biggest con of taking a cash advance is the built-in costs. Merchant cash advances are NOT considered loans, and therefore aren’t subject to the same regulations as loans. This is particularly important with regard to interest rates.

Technically, cash advances don’t have “interest” but that doesn’t mean they don’t have some hefty charges. With a little math, we can figure out the annual percentage rate (APR) to determine the real cost of the cash advance. We’re talking high double digit (or even triple digit!) APRs, significantly higher than the interest rates for many traditional small business loans. By contrast, interest rates for loans with the Small Business Administration typically range from 4% – 8%. (However, those loans do come with more requirements than many cash advances, including a personal credit score of at least 660 and a minimum loan amount of $30,000, among other things. That means they may be harder to get than a cash advance.) You wouldn’t pay triple digit interest on a loan, so why take a cash advance with that kind of fee?

Keep in mind that while cash advances include disclosure about the percentage of your sales that will be deducted to pay back your advance, this rate IS NOT the same as what an interest rate would be. If you cash advance servicer says that they will withhold 10% of your credit card sales to repay your advance, that does not mean you have a 10% interest rate on the cash advance. Instead, you’d need to do some math to find out the true cost.

For example…

Let’s say that you took a $35,000 cash advance, and that you agreed to pay back $42,000 through a deduction of 10% of your credit card sales until you reach the total amount owed. That means your cost for the cash advance is $7,000, or 20% of the total amount you received as an advance. Now, to get a rough idea of what that means in familiar terms, we can translate that into an APR by looking at the costs over a period of time. At 10% repayment, you’ll need to make $420,000 in credit card sales to completely pay off your merchant cash advance. If it takes you 12 months to make $420,000 in sales and repay all $42,000, your APR is effectively 20%. If you pay it back sooner, your APR is higher. However, if it takes longer, your APR is actually lower.

Effectively, there’s no benefit (and in fact, almost a punishment in that sense) for businesses that are showing strong credit card sales and paying higher amounts to pay off the cash advance. But, since there are no fixed repayments, you can’t control how much or when you pay back your advance.

Merchant cash advance providers know that businesses that use the cash advance option may not have great credit or have been turned down for other types of funding. Businesses trying to get cash advances may be in more dire need of the money, and therefore more willing to accept expensive overall costs later for access to cash now. It’s worth weighing the pros and cons carefully before taking a cash advance.

Maybe Pro, Maybe Con

Unlike loans, merchant cash advances usually don’t have a set repayment amount or term. Instead of a fixed payment of X dollars per month for Y months, you’ll pay a percentage of your daily credit card sales until you’ve repaid the balance. This can be good or bad, depending on your particular situation and preferences. You won’t know exactly how much your payment on any given day will be until you’ve completed all your credit and debit sales for that day.

Some businesses may find it frustrating to have an unknown sum come out of their credit card sales. However, because the deduction is always a percentage, if there are slow periods where your business isn’t making as much money, your cash advance repayment will be lower, too. You won’t struggle to meet a fixed payment amount in slower seasons.

If I go out of business, do I still owe the money for my cash advance?

Most likely, yes.

Some merchant cash advance companies claim that if a company with an active cash advance goes out of business, the cash advance company loses out because the business doesn’t repay. However, some contracts include clauses stating that the business owner is still on the hook for the amount of the cash advance even if the business goes under. It’s crucial that if you do enter into a cash advance agreement that you read all the details of your contract and consult an attorney about anything you’re unclear on.

Processor-Specific Solutions

As the credit card processing industry gets more crowded, companies are looking for ways to distinguish themselves. One way is by offering all-inclusive services, which includes providing cash advances. Two of the most well-known companies that offer cash advances are Square and Shopify. Both let you know if you’re eligible for a merchant cash advance when you sign into your processing dashboard, and make it easy to choose to take an advance. Remember, a merchant cash advance is a financial obligation – just because it seems simpler (and may only take a few clicks) doesn’t mean you shouldn’t consider it carefully.

Shopify Capital and Square Capital are only currently available to businesses based in the United States. It is not possible to apply if Shopify or Square don’t consider you pre-eligible.

The Bottom Line

Merchant cash advances are an expensive way to get access to working capital. It’s well worth your time to investigate other options first, including traditional business loans. Cash advances are a legal obligation, and shouldn’t be taken lightly just because they seem more informal than loans with set rates and terms. Read any documents carefully before agreeing to a cash advance, and consult a licensed attorney if you have questions or concerns.

1 thought on “Should You Get a Merchant Cash Advance?”

  1. Tobias Armstrong

    Thanks for talking about both the pros and cons of cash advances. As with any other type of credit, they seem like they could be very useful if they’re used in the right way, you just have to be aware of what you’re getting yourself into and be careful about how much you’re taking out. I’m doing some simple research, and this was a great summary! Thanks for sharing.

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