A Merchant Cash Advance (MCA) can provide small business owners with an upfront fixed amount of cash. The funding amount is based upon a percentage of the businesses credit card receivables using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met.
The MCA is not technically a small business loan, but rather an advance on credit card sales. MCA's are not limited in what rates they charge and what terms they establish. For this reason it is very important for a business owner to be completely aware of how the small business cash advance, or MCA product works, and how it could affect their business.
A business that uses a Merchant Cash Advance will typically pay back 15% – 40% or more of the amount borrowed. This percentage is called the factor rate.
Note: there’s a difference between the hold-back amount that a small business pays every day (as a percentage of their sales receipts) and the repayment amount for the entire advance. There could, for instance, be a hold-back of 15%, and a repayment of 30%, so it’s important for business owners to understand this distinction.
The hold-back percentage is based on:
- The amount of funds a business receives
- How long it will take to pay back the money
- How big the monthly credit card sales are
For Example: A business is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the business agrees to have 15% of the business’ credit card transactions withheld by the advance company (the holdback) until the $13,000 is collected. If the business is averaging $14,500 a month in credit card sales, approximately $2,160 would be withheld each month and the advance would be paid back in roughly six months.
Benefits of a Merchant Cash Advance
- In addition to the much easier method of obtaining working capital from an MCA provider than from a bank, the Merchant Cash Advance has a lot of incentives when it comes to small business financing:
- You won’t lose your home. MCAs are unsecured loans, so collateral is not required. This means you don’t have to forfeit any personal assets (such as your home) or business assets if your sales plunge and you fail to repay. Businesses that can’t qualify for a bank loan because of collateral requirements typically can qualify for an MCA if they have strong credit card sales.
- There is no limitation on how the funds acquired from an MCA can be used. Funds that are loaned through a financial institution must be used for the stated purpose by the business. As a result, money from a business loan has a very narrow scope of action as compared to money that comes from a cash advance.
- They’re quick. One of the biggest advantages of MCAs is that the money can be obtained very quickly — often within a week or so — with no heavy paperwork to slow things down. MCA providers will look at your business’s daily credit card receipts to determine if you can repay the money, so they will likely require that you provide bank statements and credit card receipts during the application process.
- A business cash advance is also much more beneficial to the cash flow of a company since it does not require any monthly payments or upfront fees that are characteristic of bank loans.
- When sales are down, your payment is too. Because the repayment schedule is based on a fixed percentage of your sales, repayments adjust based on how well your business is doing. So if sales are lagging, you repay less, giving you more flexibility to manage a slowdown in business
Our expert funding advisors are ready to learn about your business needs to determine if a Merchant Cash Advance is right for you and we do so with speed and transparency. Call us toll free for more info! (855) 998-5874