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Why Merchant Cash Advances for eCommerce Businesses Aren’t Ideal

You know the emotional rollercoaster of managing cash flow if you have a small business. If you’re an eCommerce merchant, the rollercoaster may feel more like a runaway train, particularly when you start exploring funding options.

Despite the steady growth of the eCommerce industry in the modern era, the financial services industry has a lot of catching up to do. While there are many financing options available for eCommerce merchants, those from banks have been designed with traditional businesses in mind. Many merchants can end up feeling confused, frustrated, and put at risk by the funding opportunities in the market.

Merchant cash advances (MCAs) are a popular approach due to their easy application process and typically swift turnaround for approval. They also have a high approval rate, with a study published by the Federal Reserve finding that 84% of loan applications were approved in 2020. They’re more accessible than other funding types, but are they the best option for you? Let’s talk about merchant cash advances for eCommerce so you can determine if they’re the right approach when you need to boost cash flow.

What Are Merchant Cash Advances for eCommerce

You may be unsurprised to hear that a merchant cash advance (MCA) is a financing method that enables merchants to receive cash in advance of sales income. That’s an overly-simplistic descriptor, of course, but it’s a good start.

A merchant cash advance provides a lump sum to merchants for business expenses, particularly when finances are tight, sales are slow, and merchants can benefit from having extra funds to reinvest in their businesses. Particularly helpful for small businesses, MCAs typically have a shorter repayment cycle (24 months or less) and very regular repayments (daily or as a percentage of every sale rather than a monthly amount).

Merchant cash advances are repaid daily from a percentage of your credit card sales. The deduction is made automatically and settled by your payment processor directly to the lender. Rather than a loan, they function as an advance receipt of funds and are repaid from future sales.

Also applicable to modern trade structures, merchant cash advances for eCommerce businesses are attached to your online sales. Repayment will draw from your sales, and you will often need to link a bank account as a backup source from which the funds will debit.

Related: How to Get Funding for Your Online Business

The Difference Between Merchant Cash Advances and Loans

We’ve mentioned that a merchant cash advance is not a loan. Fundamentally they’re much different. Let’s look at some key differences between MCAs and traditional loans.

Long-Term Loans

Long-term loans are exactly as they sound, with a repayment term of five years up to a decade or more. These loans have a lengthy application process, requiring a lot of details on your financial and business or sales history. Your credit score will also have a significant impact on your assessment for approval, and you’ll likely have to put up collateral to qualify for a long-term loan.

Long-term loans are best suited for well-established businesses with lengthy credit history to back up their request. These loans are typically for larger cash amounts and are commonly used for significant events like mergers, acquisitions, or expansion. While interest rates are often lower than short-term loans, the fee can add up over the loan’s lifespan, particularly if the balance isn’t paid back each month.

Short-Term Loans

As an eCommerce merchant, you’re likely in the small business category, and as such, a short-term loan is a more reasonable starting point. Short-term loans are typically designed for smaller amounts and are available more immediately than their long-term counterparts.

Repayment of short-term loans is between a matter of months or a few years. These traditional loans often lean heavily on your personal credit history and require collateral to secure the funds. Opt for short-term loans to obtain working capital like marketing expenses, inventory replenishment, and cover payroll. Interest rates are relatively high and you will be required to make minimum monthly payments in most cases, whether your sales are strong or nonexistent.

Merchant Cash Advances

First established in the 1990s, merchant cash advances (MCAs) allow you to receive a lump sum of cash upfront, and repayment comes from a percentage of sales. Merchant cash advances for eCommerce businesses rely upon sales made via credit or debit card as the repayment installments are taken directly as a percentage of your sales.

MCAs are not loans. Instead, they’re an advance on future revenue and are therefore not subject to the same regulations as traditional banking financing options. On the plus side, that means these advances are more accessible with a quicker turnaround for approval and receipt of cash. They also tend to have a lower barrier to entry and don’t require lengthy financial and background checks to back up your application.

A merchant cash advance provider will purchase a portion of your future sales by partnering with your credit card processor. Not only does this avail the cash to be passed on to you, but it gives the provider access to receiving funds from the processor on a daily or weekly basis to repay the balance. The automated nature of repayment means you don’t have to worry about defaulting on your loan.

Pros and Cons

As with anything, there are upsides and downsides to merchant cash advances for eCommerce businesses. Before you start filling out applications and writing business plans for spending your cash, it’s essential to see the big picture.


Quick Access

One aspect that makes merchant cash advances for eCommerce an attractive option is their easy application process. Rather than collecting piles of financial history, credit reports, and detailed business plans to state your case, the provider reviews your daily credit card receipts as a means of assessing eligibility.

Easy Approval

Since MCAs are unsecured, you won’t need physical collateral to receive funds. You can put your mind at ease without the need to put your business assets on the line and risk losing them if you are unable to meet a repayment commitment.

With an easy application process and the lack of collateral requirements, approval for merchant cash advances for eCommerce is swift. Remember that while you won’t need to put your physical assets on the table, your provider may require a personal guarantee. This guarantee effectively states that if the business is at any point unable to repay the loan, you will be personally responsible for settling the debt.

Flexible Use

Merchant cash advances for eCommerce are flexible options. Whereas some financing options require specific details of how you will spend the cash or a business plan to back up the request, MCAs are open to your discretion.

Need to boost your cash flow to cover payroll? Low inventory at a slow sales period and need to stock up before the orders start coming in again? Do you want to reach new customers through marketing activity but don’t have the funds? A merchant cash advance can offer the cash you need when you need it.

Related: How eCommerce Lending Can Help Online Sellers Grow


Higher Fees

Nothing in life is free, of course, and if you want all of the ease of access to merchant cash advances for eCommerce, you’ll pay for it.

The annual percentage rate is, on average, between 40% and 350% percent depending on the lender, size of the advance, extra fees, and how long it takes you to repay your debt. Your sales will factor in as well, of course, as your advance will be repaid as a percentage of credit and debit card transactions.

Are you thinking of saving money by repaying your loan early? Not so fast. Many institutions offering merchant cash advances for eCommerce will penalize you for early repayment. If your advance is provided at a factor rate of 1.4, your APR may rise to a minimum of 60% for paying off a 12-month advance in only six months.

As a reference, traditional bank loans have APRs around 10%, business credit cards are between 12.9% and 29.9%, and online small business loans can have APRs anywhere from 8% to 99%. Merchant cash advances are among the most expensive ways to boost your cash flow.

A reported 60% of small businesses say cash flow is a primary challenge. Make sure you choose a lending option that will make it easier, not exaggerate this challenge.

Impacts on Cash Flow

Due to the nature of repayment, merchant cash advances for eCommerce can present challenges for your cash flow. You’ll be repaying your advance frequently – often daily or weekly – through a preset amount taken from your incoming sales before you receive payment.

While that means you don’t have to fumble with accounting workflows and managing due dates, it also means a reduction in funds received. That amount can be dramatic depending on the size of your loan and the size of your fees. As we mentioned, you’ll be penalized for repaying the loan early, so that’s not an option for many merchants.

Debt Cycle Dangers

The ease of access to MCAs can move merchants into a debt cycle. For those who don’t qualify for other lending options, borrowers may find themselves with no further avenue than another merchant cash advance for eCommerce merchants. The high costs and frequency of repayments can squeeze cash flow and increase the risk of default for many small businesses.

Confusing or Complicated Contracts

When you start to look at the fine print of your MCA, you may find that they are pretty confusing. Repayment structures, high costs, and early repayment penalties add layers of complexity to understanding all of the terms of your cash advance.

While the lending industry uses standardized terms when discussing their offerings, MCAs have a language all their own. The amount you receive? That’s called a purchase price. Specified percentage? That’s the repayment amount taken as a percentage of credit card sales. Are you looking for your APR? You won’t find one in merchant cash advances for eCommerce.

Since providers don’t use APRs, it’s also challenging to compare offerings to decide what’s best for you. Keep an eye out for a confession of judgment. That’s a document you sign that releases your right to defend yourself if your provider takes you to court.

A Better Way to Boost Cash Flow

Don’t despair. You’re not limited to the choice between putting the deed to your house on the line or paying exorbitant rates. There are alternatives to a merchant cash advance for eCommerce that won’t break the bank – or take your peace of mind.

Onramp has flipped the lending world on its head by putting the needs of eCommerce merchants first. We started with our many years of experience working with online businesses and designed a financing option that fits these unique, modern needs.

Onramp has easy application and swift approval processes, meaning you can apply without telling us your entire life story and receive cash quickly. We don’t tell you how to spend the funds – use them how you need to help your business thrive. We’ll draw a percentage from your actual sales to repay your balance but have no fear: our lending rates are around 1% of GMV.

Onramp doesn’t just want to give you money – that’s only one way we can help. We want to support you in optimizing your business needs. We want to see you thrive. Set up a call so we can learn more about your goals and show you how we can help you reach them.