Merchant Cash Advance
A Merchant Cash Advance is a financial loan based upon the credit card sales of a business. By looking at the daily credit card receipts to determine if the business can pay back the funds in a timely manner, a small business “sells” a portion of future credit card sales to acquire capital immediately.
Merchant Cash Advance for Businesses
A merchant cash advance is when a provider gives a business an upfront sum of capital in exchange for a piece of future sales.
MCA is not considered a loan and repayment history is not reported by providers. Additionally, it will not assist in strengthening or building a credit profile of a business.
What Is A Merchant Cash Advance?
When a business uses a merchant cant advance (MCA) for a financial solution this isn’t technically a loan, but an advance based upon the credit card sales of a business.
A provider gives a business an upfront sum of capital in exchange for a piece of future sales. This is a fairly quick process for a business to handle and receive funds deposited into their account.
Structure of a Merchant Cash Advance
The way an MCA can be structured can be done in one of two ways:
A merchant is given an upfront sum of cash in exchange for a piece of future credit/debit sales.
A merchant is given the cash upfront that is then repaid by remitting fixed daily/weekly debits from their bank account. These are known as Automated Clearing House (ACH) withdrawals.
Instead of a fixed payment that needs to be made every month for a set period of time, a business will make daily or weekly repayments, including fees, until the advance is fully paid. Fees are determined by the ability of a business to repay the MCA and the factor rate is based on a risk assessment. A higher fee is due to a higher factor rate.
Is A Merchant Cash Advance Right For Your Business?
While it might make sense for a business in the need of quick cash to make use of an MCA as a financial product, it’s important to ensure that the costs of the product are sound for the business. It’s also important to note that repayment history is not reported by providers and it will not assist in strengthening or building a credit profile of a business.
With an MCA being fulfilled based on a percentage of future credit sales, instead of a fixed amount, the amount that the provider collects varies from month to month. For a merchant managing their own cash flow, this is very beneficial. If the business hits a slow season, collections decrease. If sales are through the roof, the collected amount is increased.
Even with the up and down flow of how sales can be for a business, the percentage that the lender collects never changes. This keeps cash flow stable and avoids a fixed repayment, which could put a serious ding into a bank account if sales are slow.
Due to the success and popularity of an MCA as a finance solution for a business, traditional lenders had to step up what their loans could offer at a better price. Whether through a conventional bank, an online lender and it’s prudent of the business to know what is being agreed upon before signing the dotted line.