Merchant cash advances

Merchant Cash Advances

A lump sum of cash is paid upfront. This money can be used to finance your business.

Instead of making one fixed monthly payment from your bank account like you would with a term loans, you pay on a merchant advance by either withholding a portion of your credit card and debit card sales each day or by withdrawing fixed amounts from your bank account every other week.

Pros:

• Quick cash

• Unsecured financing

Cons:

• The highest possible borrowing costs — as high as 350% in certain cases

• Frequent repayments can cause cash flow problems.

Ideal for:

• Companies that are able to handle frequent repayments and have high credit card sales.

• Companies that are unable to get funding elsewhere and cannot wait for capital.

An MCA is an advance in capital that can be repaid with future credit card sales. Before relying upon this costly option, business owners should look at other forms of financing.

An MCA (merchant cash advance) is an alternative to traditional small-business loans. An MCA is a cash advance that a company provides upfront. You repay it using a portion of your debit or credit card sales plus a fee.

Small businesses needing capital to meet short-term or cash-flow needs can benefit from merchant cash advances. This type of financing can have triple-digit annual percentage rates and lead to a vicious cycle of debt. Before you apply for an MCA, it is a good idea to consider all small-business loans alternatives.

Before you choose a merchant cash advance for your business, here’s some information about how they work.

merchant cash advances

How Merchant Cash Advances Work?

Merchant cash advance companies provide a lump sum capital to your business. An MCA isn’t a loan. Instead, the provider will purchase your future sales and you’ll use them to repay the funds. Plus fees.

Two ways to structure merchant cash advance repayments:

Percentage of debit/credit cards sales

This is the traditional MCA structure. A merchant cash advance provider automatically deducts daily (or weekly), a percentage of your debit or credit card sales until the advance has been repaid in full.

Merchant cash advances are not like other types business loans. They don’t have standard repayment terms. The repayment terms are determined by your sales. They can be anywhere from 3 to 18 months. The faster your sales, the quicker you’ll repay the advance.

Fixed withdrawals from bank accounts

Merchant cash advance companies are able to withdraw funds directly from your bank account. Fixed repayments are made from your account every day or every other week, regardless of how much sales you make. The fixed repayment amount is based on your monthly revenue.

This MCA repayment structure lets you calculate how long it will take for the advance to be repaid based on the amount borrowed. It is best suited to businesses that do not rely on credit and debit cards sales.

merchant cash advances

Merchant Cash Advance Rates and Fees

Merchant cash advance companies charge fees instead of traditional interest rates. The factor rate ranges from 1.1 to 1.5 depending on how your business is assessed by the provider.

Your:

• Industry.

• Many years of operation.

• Financials for businesses

• Transactions with debit and credit cards

• Score on personal credit.

Businesses with a lower ability to repay will be charged higher factor rates and may have to pay higher fees.

You will also not be charged any additional fees by the merchant cash advance company for working with them, such as underwriting fees or administrative fees. This will add to the overall cost of financing.

merchant cash advances

Calculate the Cost of a Merchant Cash Advance

Multiply the amount received by factor rate to calculate the merchant cash advance cost. If you get approved for a $50,000 advance at a factor rate 1.4, the total amount of your repayment will be $70,000. This means that you’ll have to pay $20,000 in fees.

To understand the total cost of a merchant cash loan, you need to convert the factor rate and any additional fees into an APR. This will help you calculate the time it will take to repay your advance.

Let’s see how this MCA would look if the provider took 10% from your monthly credit card sales and you paid the full $70,000. This is based on different revenue levels.

merchant cash advances

Pros and Cons of Merchant Cash Advances

Pros

• Funding is fast. Online merchant cash advance applications are possible. Usually, you will be approved within minutes and require minimal documentation. Many MCA providers provide funding within 24 hours.

• Flexible requirements. Merchant cash advance companies can work with startups and businesses with poor credit. MCAs do not typically require collateral. Providers may consider traditional business loans, but they might be more interested in your debit and credit card transactions, or your business revenue. The higher your qualifications, the higher the factor rate you will be able to receive.

• Your sales determine your repayment schedule. Your repayment schedule, unlike other forms of business financing, is based upon a fixed percentage. This means that payments can be adjusted based on the performance of your business.

Cons

• Expensive. MCAs are more expensive than other forms of business loans like business lines of credit or online term loans. Their APRs range from 9% to 99 percent. Merchant cash advances have an APR of up to 350% depending on many factors, including the amount borrowed, the fees charged, the time required to repay, and the business’s revenue. Factor rates are more complicated than traditional interest rates and can make it harder to estimate the exact cost of an MCA.

• Frequent repayments and danger of a debt cycle. Merchant cash advances are paid back daily, sometimes weekly. Payments are taken directly from your sales which can severely impact your cash flow. Due to the high cost and frequent repayments, it can be very difficult to get out of debt. This is especially true if you require another advance after you have taken one.

• There is no benefit to repaying early. You can’t save interest on early repayments because you will have to pay a fixed amount of fees, which is not the case with amortizing loans.

• Confusions in contracts It can be difficult to understand merchant cash advance contracts, especially when factor rates and repayment times are calculated based on percentages from your daily sales. MCA providers don’t usually provide APRs in agreements. This makes it difficult for customers to compare these products to other types of financing. While transparency has been encouraged by some states in recent years, MCA providers have been criticised for making difficult to understand and unclear agreements.

• No federal regulation. Merchant cash advances are not subject to federal regulation, unlike traditional loans. They are structured as commercial transactions. MCAs in each state are instead regulated by the Uniform Commerce Code. Due to this lack of regulation, many businesses have fallen prey to predatory companies who use misleading marketing tactics and sell quick funding.