If you've ever received money for your business and then noticed money being taken out of your business bank account every day or every week, you may have a Merchant Cash Advance, also called an MCA.
If you've never heard of an MCA before, don't worry. You don't need to understand complicated financial terms to understand how one works.
Let's break it down in plain English.
So, What Is a Merchant Cash Advance?
A Merchant Cash Advance is a type of business financing.
A company gives your business money upfront.
In return, your business agrees to give that company a larger amount of money over time.
For example, let's say a company gives your business:
$50,000
You agree to provide:
$70,000
back over time.
The $20,000 difference is part of the cost of getting the money. The way you make those payments depends on your agreement. Some businesses make payments every business day. Others may make payments on another schedule. That's one of the first things that makes an MCA different from the financing many people are familiar with.
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Why Would a Business Get an MCA?
Usually, a business gets an MCA because it needs money quickly.
Maybe you need money for:
- Payroll
- Inventory
- Equipment
- Rent
- Repairs
- Expansion
- Marketing
- An unexpected business expense
Traditional banks may take time to approve financing.
They may also look closely at things such as credit history, financial statements, time in business, collateral, and other factors.
Some MCA providers focus heavily on the business's revenue and bank activity.
That can make an MCA attractive to a business owner who needs access to money quickly.
But getting money quickly doesn't mean the financing is inexpensive.
That's something every business owner should understand before signing an agreement.
How Does an MCA Work?
Let's use a simple example.
Imagine your business receives:
$50,000
You agree to pay back:
$70,000
The company then begins taking payments from your business.
For example, you might have an agreement that results in payments of:
$500 per business day
You continue making those payments until you've satisfied the agreement.
The exact amount, payment schedule, and terms can vary from one agreement to another.
That's why it's important to read your specific agreement rather than assuming every MCA works the same way.
Why Is Money Coming Out of My Bank Account Every Day?
This is one of the biggest questions business owners have.
You may look at your bank statement and see something like:
ABC Funding — $500
Then the next business day:
ABC Funding — $500
And again:
ABC Funding — $500
If you don't remember agreeing to a daily payment, you may be confused about what's happening.
Many MCAs are paid through electronic withdrawals from the business bank account.
These are often called ACH payments.
ACH is simply a way of electronically moving money between bank accounts.
So if you see repeated withdrawals from a financing company, don't ignore them.
Find out what they are for.
You may discover that they're payments for an MCA you previously accepted.
Is an MCA the Same as a Regular Business Loan?
Not necessarily.
This is where things can get confusing.
An MCA is generally structured differently from a traditional business loan.
With a traditional loan, you typically borrow money and agree to repay that amount plus interest over a specific period.
An MCA is commonly structured around the purchase of future business receivables.
In simple terms, the MCA provider gives you money today in exchange for an agreed amount of your future business revenue or receivables.
The legal and financial details can vary, so you should look at the actual agreement you signed.
We'll explain the difference between an MCA and a loan in more detail in our guide:
MCAs vs. Loans: Key Differences
What Is an MCA Payment?
An MCA payment is simply the money your business sends back to the MCA provider under the agreement.
Depending on the agreement, payments may be:
- Daily
- Weekly
- Or made according to another schedule
For example, if you're paying $500 every business day, that might not sound like much at first.
But let's add it up.
$500 × 5 business days =
$2,500 per week
That's approximately:
$10,000 per four weeks
Now you can see why an MCA payment can have a major impact on a small business.
What Happens If You Have More Than One MCA?
This is another important thing to understand.
A business can have more than one MCA.
For example:
MCA #1 — $400/day
MCA #2 — $300/day
MCA #3 — $200/day
Now your business is paying:
$900 every business day
That's approximately:
$4,500 per week
or roughly:
$18,000 per four weeks.
This can put serious pressure on a business's cash flow.
Having multiple MCAs is sometimes called MCA stacking.
The term sounds complicated.
It simply means having multiple merchant cash advances at the same time.
Why Can an MCA Become Difficult for a Business?
The problem isn't necessarily that an MCA exists.
The problem can be the size and frequency of the payments compared with the amount of cash the business actually has available.
Imagine your business brings in:
$100,000 per month
That sounds like a healthy amount of revenue.
But let's say you spend:
$60,000 on normal business expenses
and
$25,000 on MCA payments.
That leaves only:
$15,000
for everything else.
If sales slow down, an employee needs to be replaced, equipment breaks, or another unexpected expense comes up, that $15,000 can disappear quickly.
This is why a business can have strong sales and still have serious cash-flow problems.
How Do I Know If I Have an MCA?
If you're not sure, start with your business bank statements.
Look for:
- Repeated withdrawals
- Daily withdrawals
- Weekly withdrawals
- Companies you don't recognize
- Financing companies
- ACH withdrawals
Then look through your email and business files.
Search for terms such as:
Merchant Cash Advance
Business Funding
Business Financing
Purchase of Future Receivables
ACH
You may also find the original agreement.
If you still aren't sure, ask someone qualified to review the agreement with you.
What Should I Look for in My MCA Agreement?
You don't have to understand every page.
Start by finding these basic numbers:
How much money did you receive?
For example:
$50,000
How much are you expected to provide back?
For example:
$70,000
How much are you paying each time?
For example:
$500 per business day
How often are you paying?
Daily?
Weekly?
Something else?
How much have you already paid?
This can help you understand where you currently stand.
What If My MCA Payments Are Becoming Too Much?
If your business is struggling because of MCA payments, don't automatically assume that taking another advance is the answer.
First, figure out exactly what's happening.
Add up:
Money coming into the business
minus
Normal business expenses
minus
MCA payments
Then see what's left.
If there isn't enough money left to comfortably operate the business, you may need to look at your options.
Depending on your situation, those options could include negotiation, restructuring, settlement, or other business debt strategies.
There is no single solution that works for every business.
The Bottom Line
A Merchant Cash Advance is a way for a business to receive money upfront in exchange for an agreed amount of future business receivables.
It can provide quick access to business capital.
But the payment structure can become difficult if the payments take too much of the business's available cash.
If you aren't sure whether you have an MCA, start with your bank statements.
Look at who's taking money out.
Then find the agreement that explains why.
You don't have to be a financial expert to understand your MCA.
You just need to know:
How much did I receive?
How much do I have to provide back?
How much am I paying?
How often am I paying?
And how much money does my business have left after those payments?
Once you know those answers, you can make much better decisions about what to do next.
Eastern Financial Partners helps business owners understand their business financing and explore potential options when debt payments are putting pressure on cash flow.
Sources and Further Reading
For additional information about Merchant Cash Advances, see:
- SoFi — Guide to Merchant Cash Advances
- The Wall Street Journal — What Is a Merchant Cash Advance?
- MCAs vs. Loans: Key Differences
If you want to know more about your financial freedom as well as tips and staying up to date on the newest financial news, subscribe to our Newsletter at Fresh Start Letter.
Disclaimer: This article is for general educational purposes and is not legal, financial, or tax advice. MCA agreements can differ substantially, so review your specific contract and consult an appropriately qualified professional about your individual situation.
