How to Qualify for a Merchant Cash Advance

When your small business needs a cash boost, a Merchant Cash Advance (MCA) can seem like an easy fix. Unlike traditional loans, MCAs are designed to give business owners quick access to capital based on their future sales or credit card transactions. However, just because you’ve got a business doesn’t automatically mean you’ll qualify. Understanding how the process works and what factors lenders consider can greatly increase your chances of approval.

Understanding the Merchant Cash Advance

Before diving into how to qualify, let’s take a quick look at what an MCA really is. Essentially, an MCA is a lump sum payment you receive from a lender in exchange for a portion of your business’s future revenue. Unlike traditional loans, you don’t need to provide collateral, but instead, the lender takes a percentage of your daily sales or credit card payments until the loan is repaid. This means repayments are linked directly to your sales—so when you’re doing well, your repayments are higher, and when sales dip, they reduce accordingly.

The key factor here is that MCAs are not loans in the traditional sense, meaning they are not subject to the same lending regulations as a loan from a bank. As a result, they can sometimes be easier to access, especially for businesses that may not have strong credit histories or assets.

What Do Lenders Look For?

Now that you know what an MCA is, let’s talk about how to qualify for one. Lenders look at several factors to determine whether your business is a good fit for an MCA. These include:

1. Your Business’s Daily Sales
2. Time in Business
3. Credit Card Processing History
4. Personal Credit Score
5. Revenue and Cash Flow Stability

Let’s break each of these down and see how they impact your eligibility.

1. Your Business’s Daily Sales

The most important factor when qualifying for an MCA is your business’s daily sales volume. Lenders will want to know how much money your business brings in on average every day. This is because they are essentially buying a portion of your future sales, so they need to be confident that your business will generate enough revenue to cover the repayment.

Typically, lenders prefer businesses that process at least $5,000 in monthly sales. The more your business makes, the better your chances of qualifying for an MCA with favorable terms.

2. Time in Business

Unlike traditional loans, which often require businesses to have been operating for several years, MCA lenders are more focused on your sales history. However, they still like to see that your business has been around for a reasonable amount of time. Most MCA lenders require your business to have been operating for at least 6 months to 1 year.

While you don’t need a long history, a longer track record does signal to lenders that your business has some stability. For newer businesses, some lenders may still approve an MCA if you have strong sales right out of the gate.

3. Credit Card Processing History

Since the repayments for an MCA are typically tied to credit card transactions, lenders will scrutinize your business’s credit card processing history. They want to ensure that your business is regularly processing enough credit card payments to sustain the daily repayment schedule.

The higher your average daily credit card volume, the better your chances. If your business doesn’t rely on credit card payments as much—say, for example, you run a cash-only business—this could make it harder to qualify. If your business operates mostly through credit cards, be sure to provide clear records of your processing history.

4. Personal Credit Score

Unlike traditional loans, an MCA is based primarily on your business’s financial performance, but your personal credit score can still play a role in the decision. While an MCA is considered a higher-risk lending option, lenders will still look at your personal credit score to determine the overall risk they’re taking on.

For businesses with poor credit, an MCA can often be an easier way to access funding than a traditional loan. That said, a personal credit score of 650 or higher typically puts you in a better position to negotiate more favorable terms.

5. Revenue and Cash Flow Stability

Beyond just your daily sales, MCA lenders want to see that your business has consistent revenue and healthy cash flow. Even if you’re not processing huge amounts of credit card transactions, lenders are looking for signs that your business is capable of weathering fluctuations in sales and staying on track to meet repayment schedules.

Businesses that experience seasonal dips in revenue or that have inconsistent cash flow may have a harder time qualifying for an MCA. To boost your chances, lenders typically want to see that you’ve been able to maintain relatively stable revenue for at least three to six months.

The MCA Application Process

So, you meet all the basic qualifications—what’s next? The application process for an MCA is relatively straightforward, but there are some key steps you’ll need to follow to improve your chances of approval:

1. Gather Necessary Documents Most lenders will require proof of business ownership, tax returns, bank statements, and credit card processing statements. Some may also ask for personal identification or personal credit score information. Make sure to have all of this prepared in advance so you can submit it quickly when you apply.
2. Fill Out the Application Most MCA applications are completed online, and the process is generally much quicker than applying for a traditional loan. You’ll fill out information about your business, such as your revenue and sales history, and submit the documents you’ve gathered.
3. Wait for Approval Once you submit your application, lenders will review your financials and determine whether you qualify for an MCA. Unlike traditional loans, the approval process can be quick, with many businesses receiving an answer within 24 to 72 hours. Some lenders may approve you instantly if your business meets their criteria.
4. Review Terms and Sign If approved, you’ll be presented with the terms of the MCA. Make sure you fully understand how much you’re borrowing, the repayment schedule, and any fees involved. Unlike traditional loans, MCAs can have relatively high fees and interest rates, so it’s essential to know exactly what you’re agreeing to before signing on the dotted line.

Advantages and Disadvantages of an MCA

Like any financial product, a Merchant Cash Advance has both its pros and cons. Understanding these can help you decide if it’s the right fit for your business.

Advantages:

• Quick Access to Funds: MCAs are much faster to obtain than traditional bank loans. If you need capital in a hurry, an MCA can be a great option.
• Flexible Repayments: The repayment is tied to your sales, so during slower periods, your payments are lower.
• No Collateral Required: Unlike traditional loans, you don’t need to provide collateral to secure the loan.

Disadvantages:

• High Costs: Because of the risk involved, MCAs often come with high interest rates and fees.
• Shorter Repayment Period: The repayment terms are generally shorter than traditional loans, which can lead to higher daily payments.
• Sales Dependency: If your sales dip, your repayments could become a burden, making it harder to keep up.

Is an MCA Right for Your Business?

While an MCA can provide fast and easy access to capital, it’s not the right choice for every business. If your business has stable revenue and doesn’t experience significant fluctuations in cash flow, a traditional loan or line of credit might be a more affordable option. However, if you’re in need of quick funds and have strong daily sales, an MCA could be a perfect solution to keep your business running smoothly.

Before applying, be sure to thoroughly research different lenders, compare terms, and understand what you’re committing to. An MCA can be a lifesaver for your business, but only if it’s the right tool for your situation.

In the end, qualifying for an MCA requires more than just strong sales; it’s about having a solid financial foundation and ensuring you can handle the repayments. With the right preparation and understanding, you can make an informed decision that benefits your business long-term.