If your business sells products via credit or debit card payments but sees a dip in sales, a merchant cash advance could help you make ends meet temporarily. Most applications are accepted as long as you have enough sales history to show that you can repay. But since MCAs aren’t business loans, they’re not limited by lending laws and can charge top dollar in borrowing fees.

• A merchant cash advance forwards cash against future sales.
• This type of business financing is easy to qualify for.
• MCAs have aggressive repayments.
• Borrowing fees are high with rates of 50 percent to 100 percent or more.

Typical financing fees for MCAs:

• Factor rates. MCAs may charge factor rates between 1.1 to 1.5, multiplying that rate by the amount you’re borrowing. These are typically charged on business loans for riskier borrowers.
• Origination fee. This fee is charged as a percentage of the borrowed amount and is a common fee to other business loans as well.
• Underwriting or funding fee. This fee is charged for reviewing the financing application. It may get charged as a percentage of the borrowed amount or a flat fee, depending on the financing company.
• Administrative fee. This flat fee covers the cost of processing or maintaining the MCA agreement.

Factor rates: Why MCAs are expensive

Because merchant cash advances charge a factor rate, the cost of borrowing is often higher than other types of business financing such as a working capital loan.

Take the $100,000 cash advance with a factor rate of 1.4 and 14-month repayment term for example. If you convert the factor rate into an interest rate, the annual interest rate for the $100,000 advance is 34 percent.

By comparison, if you were able to take out a short-term loan for the same amount with a 34 percent APR for one year, you would have more time to pay off your loan. Monthly payments would also be smaller, and you’d pay less in borrowing costs overall. Use a business loan calculator to help you crunch the numbers and see how much more expensive factor rates can be.

Pros and cons of MCAs

Pros:

• Approval rates as high as 90 percent. Merchant cash advances are an accessible type of business financing for bad credit borrowers. MCAs may take businesses with credit scores in the 500s.
• Fast funding. Most MCAs are offered through online lenders, which often fund within 24 to 48 hours. You may be able to apply through a streamlined online application.
• No collateral needed. MCAs use future revenue to guarantee repayment, which means the financing company won’t require you to back the advance with other business collateral.

Cons:

• Daily or weekly repayments. You’ll be on the hook with this aggressive repayment schedule until the advance is fully repaid.
• Factor rate fees often cost more than conventional loans. The fees paid on an MCA can translate into interest rates of 50 percent to 100 percent or higher.
• Doesn’t build credit. MCAs don’t report your payments to the credit bureaus, so you won’t improve your credit through this financing option.
• Not subject to loan usury laws. MCAs aren’t technically business loans, so they’re not required to abide by maximum interest rates set by each state’s usury laws.