A merchant cash advance is a type of funding that allows businesses to borrow against future sales. The MCA provider pays the funds upfront, and in return, the business agrees to repay the MCA with a percentage of its future credit and debit card sales.
Because repayment is based on sales volume, merchant cash advances are particularly helpful for businesses with fluctuating or unpredictable income streams. If your restaurant has a timeframe where you’re making a particularly large amount of money, you’ll make larger payments to your MCA provider. The inverse is also true.
Loans with traditional interest rates vary in their expense because faster payment means less money paid in total interest. Not so for an MCA. Instead, MCAs traditionally come with a well-defined total repayment amount.
Let’s say you receive a $25,000 lump sum as a merchant cash advance. The MCA provider will also provide what’s known as a factor rate, which helps establish your total repayment amount. If your factor rate is 1.25, for example, you’ll multiply 25,000 by 1.25 and find that the total repayment amount will be $31,250. No matter how quickly or slowly you pay it back, you’ll pay back $31,250.