6 days ago
Understanding Merchant Cash Advances: What SMBs Should Know
By Raymond Grand, Founder of JRG Funding, specializing in alternative finance solutions for small and midsized businesses across the U.S.
In today's rapidly shifting economic landscape, traditional financing methods don't always meet the needs of small and medium-sized businesses (SMBs). With traditional banks having stricter underwriting requirements and a dwindling appetite for risk, many SMBs struggle to access financing. This pushes some to pursue alternative finance options, such as merchant cash advances.
At my company, which specializes in alternative finance options, we're seeing this trend firsthand. Many of the SMB leaders who come to us have already been denied by banks or faced months-long delays. These aren't failing businesses; they're profitable, growing companies that need access to capital. We're also seeing more inquiries for larger deals than ever before, signaling that even some well-established businesses are turning to MCAs as a potential tool.
The Rise Of Alternative Finance
Global alternative finance volumes, excluding China, grew from $89 billion in 2018 to $113 billion in 2020, according to a report by the Cambridge Centre for Alternative Finance. The Business Research Company projected that this market could exceed $676 billion by 2029.
MCAs, in particular, have emerged as a fast-growing segment, and they're expected to grow from $17.9 billion in 2023 to $32.7 billion by 2032, Allied Market Research said. To me, this growth reflects a major shift in how business owners are thinking about capital.
How Merchant Cash Advances Work
MCAs have evolved into a financing tool used in a broad range of industries—from construction and logistics to healthcare and e-commerce. Rather than issuing a traditional loan, MCA providers purchase a portion of a business's future receivables and deliver a lump sum of working capital up front. Repayments are made through daily or weekly remittances, often automatically deducted as a fixed percentage of daily sales. In my experience, this structure tends to be particularly attractive to businesses with seasonal revenue, fluctuating cash flow or urgent capital needs.
Compared to traditional loans, which may take weeks, MCA deals can often be completed within a few hours, as the underwriting is typically based on bank statements and revenue trends. Additionally, for underserved businesses, MCAs may represent one of the few accessible capital options. Businesses with limited credit, recent tax liens or past bankruptcies may still qualify.
MCAs can also offer flexibility. Repayment, for example, is structured to scale with business performance, which can be helpful in unpredictable economic conditions. And whether an owner is paying for inventory, payroll, equipment or expansion, MCAs typically come with minimal restrictions, which can give business owners more autonomy over how they deploy capital.
Risks Of MCAs: What Business Owners Should Consider
While MCAs may be a helpful tool when used strategically, like any financial product, they come with responsibilities and must be approached with caution.
First, you should consider whether an MCA is the best fit for your business. It may be a good option if you have strong, consistent cash flow and you're seeking short-term capital for a time-sensitive opportunity—like purchasing discounted inventory, bridging a seasonal dip or launching a new location.
However, MCAs aren't ideal for every situation. If your margins are thin, revenue is unpredictable or you're using funds to cover ongoing losses, the daily repayment model can create additional strain. Business owners should treat MCAs as a strategic growth tool—not a bailout—and only proceed if they have a clear plan in mind for a return on the investment.
Additionally, consider the risks of this financing option. Some of the most serious are over-extending yourself and stacking, which is when a merchant takes multiple advances from different providers at the same time. It might feel like a short-term solution, but stacking often leads to unsustainable daily payments and severe cash flow issues. We regularly see merchants request more capital than their cash flow can support.
It's critical that deals are structured in a way you can actually afford them. If you're considering an MCA, begin by asking the right questions: What is the total payback amount? Is the rate presented as a factor rate or an annual percentage rate(APR)? How will the daily or weekly repayment impact cash flow? Are there prepayment discounts or renewal expectations?
You also need to be transparent if you're working with multiple providers. When merchants stack with multiple providers without coordination or transparency, they undermine that structure and put themselves at risk of overleveraging. In my experience, a single, properly underwritten advance is almost always safer and more sustainable than several uncoordinated ones.
When looking for a provider, remember that due diligence is essential to ensure you're working with a reputable MCA firm. The provider should walk you through the full cost, structure and expectations. They should also assess your ability to manage the repayment schedule without jeopardizing operations. If a provider is vague, pushy or avoids direct questions, that's a red flag.
The Bigger Picture
As SMBs wrestle with inflation, labor shortages, supply chain disruptions and changing consumer behavior, they need funders who understand their urgency, believe in their vision and can move at the speed of business. Looking ahead, I believe the alternative finance space is poised for more growth and legitimacy as technology improves underwriting precision and capital sources become more diversified.
However, entrepreneurs and business owners exploring alternative finance options like MCAs should educate themselves, ask tough questions and partner with funders who operate transparently. For those who do, the new era of finance isn't just an opportunity—it may be a competitive advantage.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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