The Merchant Cash Advance (MCA) industry is expected to grow to $79 billion by the end of 2022 – a 17% increase over 2021.
The market's continued growth can be attributed to the increasing adoption of MCAs by restaurants and retailers fueled by the demand for easy, fast, and reliable alternatives to traditional financial services.
But putting aside the convenience, the real driver is the need for funds.
43% of merchants applied for a loan in 2021, and 29% of small businesses failed because they ran out of money. Those are sobering statistics when you consider that there are 32.5 million small businesses in the U.S., accounting for 99.5% of all U.S. businesses.
MCA vs. Traditional Funding
According to the Federal Reserve, the approval rate for a merchant cash advance was 85% in 2021 – the highest of all types of business funding. In contrast, only 27.7% of merchants were approved for a bank loan.
Banks usually require strong personal and business credit scores, a personal guarantee, collateral, and healthy financials in consideration for a business loan. Applying for a traditional loan also takes serious effort and time: the whole process can last from one to three months.
The application process for an MCA is more streamlined and more manageable than the bank loan process. Merchant cash advances do not require complicated paperwork and collateral. An MCA can be approved and funded in just a few days.
Despite all the benefits of an MCA, the product still suffers from the notion that it is too expensive. But that is changing. With interest rates on traditional loans rising, the cost of an MCA has become more competitive.
The Cost Of An MCA – The Factor Rate Explained
Unlike an interest rate or an APR (annual percentage rate) on a traditional loan, a factor rate determines the cost of an MCA. Factor rates are typically between 1.1 and 1.5 and depend on the type of business, the length of time the business has been open, and the amount of credit card sales.
To determine an MCA's cost, multiply the advance amount by the factor rate. The total is the amount you will pay back to the funder.
For instance, if you get a $10,000 MCA with a 1.3 factor rate the calculation would be: $10,000 x 1.3 = $13,000. So, you will pay back $13,000 for borrowing $10,000, and the cost is $3,000.
However, unlike a traditional loan with a fixed repayment amount and a longer payback time, the repayment of an MCA usually takes from six to twelve months, and the payback amount is flexible; it can increase or decrease depending on the merchant's daily card sales. Since a merchant is not tied to a fixed repayment with an MCA, the impact on cash flow can be negligible.
MCA vs. Equipment Leasing
MCAs are often compared to equipment leasing programs. There are benefits to leasing, such as easier financing than a traditional loan, you can deduct leasing costs as a business expense on your tax return, and the ability to upgrade your equipment (if the lease allows it.)
But there are also serious downsides to leasing. The overall cost of leasing is more expensive in the long run – think of leasing a car. There are complicated terms such as required insurance on the equipment and fees for the leasing process, maintenance, and repairs. There are also early termination fees, and the required payout of any remaining lease payments if you decide you don’t need the equipment before the lease ends.
Ease, Simplicity, And Speed – The Benefits Of An MCA
The real benefit of an MCA over a traditional loan or a lease is that a business will receive an infusion of cash quickly. A pizzeria with a broken pizza oven needs that equipment repaired or replaced immediately, and applying for a bank loan or searching for the right leasing program won't help in that scenario.
As with anything regarding your business, first, do your homework. You'll find there are good and bad merchant cash advance providers. Since 2005, Quikstone Capital Solutions has helped tens of thousands of merchants with MCAs for their businesses. Quikstone has an A+ rating with the Better Business Bureau, and 80% of its merchants are repeat customers – one of the industry's highest renewal rates.
Quikstone is a direct lender, so the process is fast. With a simple one-page application and no collateral needed, the process is easy. If your business accepts credit cards, you could qualify for up to $250,000 and use that money for any business need.
If you need money for your business, don’t wait any longer. Use our ROI calculator to see how much you can make with an MCA from Quikstone, then contact us today.
