Merchant Cash Advance – What are the Options for Your Business?

When it comes to methods of repayment, there are three types:

Split Withholding

With a split withholding MCA, payments are automatically deducted from your merchant account and transferred to the MCA provider by your credit card processor.

Lock Box or Trust Account Withholding

In this scenario, all credit card sales are deposited into a bank account controlled by the finance company who then transfers the funds back to the business account, less the payment owed.

ACH Withholding

The ACH withholding repayment plan is an automatic debit from the business checking account.

There are also two ways the repayments may be structured:

Sale Structure – Percentage of Credit Card Sales

The predetermined percentage of sales is an estimate based on your projected monthly revenue.

With fluctuating sales, you can expect your payment to change correspondingly.

This can mean a longer repayment period than expected for many purchasers.

Loan Structure – Fixed Payment

This kind of agreement stipulates a daily or weekly payment based on an estimate of your monthly revenue.

Unlike the repayment structure tried to credit card and debit card sales, your payment is the same every month regardless of sales volume.

As with any form of financing, the main cost you will pay is interest (referred to here as a factor rate.)

Let’s take a look at an example…

If you take out an advance of $30,000 with a factor rate of 1.2, you would repay $36,000.

Your total interest costs would be $6,000 for this particular advance.

This might not seem like a bad deal, but you need to take into consideration your annual percentage rate (APR).

This is the effective rate of what you are paying when you take the interest, time and payments into consideration.

In addition to paying back your factor there may be also be origination fees.

As always, be sure to ask your lender to help you understand all the fees they charge before signing up.

How to Calculate APR (and Why It Matters)

APR is the best indicator of whether you’re getting a good deal on your business finance advance.

Considering that a small business cash advance is one of the most expensive sources of capital, make sure you know exactly what interest rate you’re paying. You otherwise wouldn’t know which option is the best one for you.

Once you know the lump sum that you will receive as an advance and how much you have to pay back, you can use an APR calculator to determine what your APR is.

Different terms and payback periods will also impact your APR.

*Make sure that you use a specific merchant cash advance calculator and not a mortgage or credit card APR calculator as the interest is charged differently.

How Long Will It Take To Pay Off?

Every advance is different, however, most are paid off within three to twelve months.

If you elect to pay it back as a percentage of your sales, you will not be able to determine an exact timeframe for paying it off if your payments fluctuate.

If you end up with higher credit card transaction revenues than you anticipated when you took out the advance, then it will be paid off faster.

Likewise, if your sales go down, the it will take longer for you to pay off your balance.

In most cases, it’s better to pay off a business loan as quickly as possible.

With an MCA, however, there is no advantage to early repayment.

In fact, the APR drops the longer you are making repayments because the effective cost of access to merchant capital is reduced over time.

If you need the cash for your business quickly and don’t have time to deal with the paperwork of getting other business loans then an MCA is probably worth a look.

Simply submit your merchant processing reports (and possibly some bank statements) and you will be presented an offer. Funds can be in your account in a matter of days, not weeks.

A merchant cash advance is unsecured, meaning the money is not tied to an asset.

If sales plunge and you fail to repay, you and your business will not be on the hook.

However, some providers may require a personal guarantee in the MCA contract.

This can be a huge factor for struggling small businesses, as they provide a lump sum of money in exchange for the promise of future sales, so advances can be approved with little consideration of credit rating.

For all it’s advantages, an MCA is one of the priciest ways to get funds for your business:

APRs can be as high as 350%!

Compare this to a credit card at 13.12 – 19.87% APR, or an SBA loan at 4 – 10% and you can see how the costs can quickly add up.

High sales are a good thing, right?

Right, but when calculating the effective cost of financing, the longer you get to hold onto the funds, the more valuable they are to you.

Considering that higher sales will lead to higher payments and higher payments will result in quicker repayment of your advance…

All this adds up to a higher APR for you.

Because they are an expensive form of capital and they take payment every day you can find your business stuck in a cycle where you have to have a business cash advance at all times.

MCAs are not technically considered business loans in the eyes of the law because they are buying your future revenue.

Instead they are regulated at the state level Uniform Commercial Code.

Some companies in the merchant cash advance industry can be deceptive and similar to payday loan companies.

The Small Business Finance Association is a group of alternative lenders trying to increase transparency in the industry.

They recently came out with new best practices guidelines, so  make sure you ask your MCA provider if they are working within these guidelines.

If you are trying to build business credit an MCA will not help you.

Since it is technically not a loan it is not reported to business credit agencies.

When to Use an MCA

An MCA should only be used for short-term financing, and should not be considered a long-term solution for chronic cash-flow issues.

1) Other Options Are Limited

If you can’t qualify for a traditional loan or an alternative loan product, it may be worth biting the bullet and accepting the higher APR.

2) Sales Are Seasonal

The variable payments available with MCAs may be attractive for you if a fixed payment sounds too risky.

Your MCA can help with inventory purchases, debt payments, working capital, and unexpected expenses.

3) Your Credit Card Revenue Is High

In order to borrow against future credit card transactions, you’ll need to already be processing credit cards– makes sense, right?

In addition, this option really only makes sense for those businesses that generate most of their revenue from credit card transactions.

4) You’ve Been In Business For At Least 1 Year

In most cases you’ll need to have already been in business for at least 1 year to take advantage of a merchant cash advance.