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Short-term financing in the form of a merchant cash advance, or MCA, is essentially a sales agreement in which capital is exchanged for a proportion of future sales.

It is best suited for small businesses or startups that need to receive a large amount of money quickly with minimal strings attached.

Short-term financing in the form of a merchant cash advance, or MCA, is essentially a sales agreement in which capital is exchanged for a proportion of future sales.

It is best suited for small businesses or startups that need to receive a large amount of money quickly with minimal strings attached.

Small business owners may want to save or expand their business or solve a brief financial issue. This type of financing is intended for short-term purposes and fills a void for companies unable to secure traditional financing from banks.

If the future sales projections of your business look promising, but you need upfront capital to secure those projected sales, merchant cash advances may be for you and your business.  MCA financing provides a short-term solution with instant cash flow. Typically, this is a financing resource for hopeful entrepreneurs and small business owners looking to cash in on a unique opportunity or to fund inventory for a large sale.

What is a Merchant Cash Advance?

Merchant cash advances are not technically classified as loans; rather, an exchange of money now for a future promise. Obtaining a merchant cash advance is not a difficult nor tedious venture.

The MCA firm accepts a small business’ application based on minimal requirements and little personal information. The cash advance can be anywhere between a few thousand dollars to $200,000, depending on how much the business owner requests and what the financials look like.

If accepted, you will receive an amount of money that is calculated based on your future sales projections and risk. Most firms cap the lump sum at 250% of your companies’ current revenues for security reasons.

MCA Repayment

The payment of this capital occurs either as a percentage of future revenue from sales or as a fixed amount. The risk is embedded in borrowing against the future sales of your business – and the future is variable and uncertain. The economic cycle, too, is somewhat unpredictable and inevitable, and it is near impossible to foresee how your business will role with its cyclical nature.

To repay the advance, the business will typically pay at a rate of up to 12-18% of sales on a daily, weekly, or monthly basis. This is called the holdback amount. If the business chooses to repay the advance with a fixed remittance, fixed daily withdrawals will automatically be removed from the account. This payment method does not fluctuate with the business’ sales.

The payment schedule is fixed and occurs either weekly or daily. The percentage that is agreed upon is held back from sales and is automatically paid to the merchant cash advance funder until remittance is complete.

The principal of the loan plus an additional 20% to 50% is withheld from profits until completely paid off. The additional costs are embedded in the factor rate, which is similar to annual percentage rates in traditional loans but is rigid and predetermined in the contract.

It is calculated based on the risk of the business by assessing sales projections, current financial situation, and historical monthly and annual sales. The stronger the financials and historical sales of a company are, the lower the additional costs of financing with a merchant cash advance.

Where Do Factor Rates Come In?

The factor rate, not an annualized percentage rate associated with traditional loans that vary alongside pay periods, determines the cost of an MCA. The factor rate is determined upfront and does not change during the term of the advance. It is determined based on the industry, business history and tenure, annual revenue, and sales projections.

Factor fees range from 1.1 to 1.5 on average. Keep in mind that this type of cash advance costs 10% to 50% more than the principal amount. Financing can be set up daily or weekly depending on your preference.

Here is an example: Your business gets approved for a $100,000 cash advance. Prior to the advance, the factor rate is calculated at 1.2 based on your industry, sales projections, and annual and monthly revenue.

  •   The advance your business receives: $100,000
  •    How much your business will owe: $120,000

If in the contract, remittance is 5% of weekly sales and your company brought in $5,200 in sales this week, then the MCA firm would automatically take $260.

Regulations & Requirements of an MCA

There are minimal requirements for a business owner to receive a business cash advance.

Merchant cash advance financing requires a history of credit and debit card sales, a minimum monthly volume of sales, and minimum annual revenue. The lender will likely run a soft credit check, which will not hurt your credit score.

The minimum monthly revenue that MCA providers accept vary from $5,000 to $12,000 depending on the company. Some firms accept applications from businesses as young as 3 months in operation, but again, that is dependent on the provider.

Essentially, the better your business’ cash flow is, the larger the cash advance. Good cash flow means consistent or increasing sales.

You can be expected to provide business tax returns, credit card processing statements, bank account statements, and credit check authorization to get approved for the advance.

The Pros and Cons of an MCA

There is no collateral required because it is an unsecured loan, and you are not held personally responsible for failure to make payments. However, failed payments will be detrimental to the business.

Perfect credit history is not necessary, but a decent credit score is preferred — 500 is the bare minimum.

Pros of a Merchant Cash Advance

  • Easy Qualification: Small businesses qualify for merchant cash advances easier than traditional forms of financing. With a low credit score, a young business or fresh startup with little personal information, can receive an MCA.
  • No Collateral: You do not need to sacrifice your home or collateral at the expense of success for your business. Business assets are not required either.
  • Speedy Process: Application, approval, and funding can occur in as little as 2 days. A large amount of cash is at your fingertips.
  • Payment Schedule: Payments vary according to the sales your business is doing. This relieves the stress of having to make a payment with the cash that you do not have. Instead, you have the freedom to allocate resources towards increasing sales. Some MCA companies do have a required minimum payment even if sales are low. Check that out in the terms of the exchange.
  • No Money Restrictions: Unlike other methods of financing, merchant cash advance providers do not place restrictions on how you use the capital. This type of financial freedom can be the pivotal moment that takes your company to previously untapped levels of success.

Flexible Payments: The payments coincide with income from sales. This ensures that your company is not pinned against a wall with fixed payments that you cannot afford.  MCA advisors do have a minimum repayment in the case that sales dip too low.

Cons of a Merchant Cash Advance

  • Not a Credit Builder: Merchant cash advance firms do not require an Employer Identification Number and do not report the financials to credit bureaus, so do not expect to build your credit.
  • Fees: Small business owners should be wary that financing with merchant cash advances is generally more expensive than other methods like traditional small business loans.
  • Profit Reduction: The MCA provider receives income from your sales, which significantly reduces the total profit of your own business.
  • Quick Repayment: Remittance of the advance sneaks up fast. Depending on the MCA type, the payment period can range from 3 months to 24 months. An average term is 8 to 9 months.
  • No Benefit in Paying Early: You will not save on the cost by making early payments. Because the factor rate does not change, there is no variance in remittance like there would be with APR on a traditional loan.
  • Hidden Fees: Some terms of the contract are unclear and include hidden fees. You will most likely rack up administration fees, servicing charges, and closing fees on top of the additional cost of the cash advance.  Factor rates may also be presented in ways that make the advance seem affordable.
  • Not a Long-Term Solution: MCAs only last up to a year, so it is a temporary fix, not a long-tailed solution to the cause of the cash flow issues.

Industries Made for Merchant Cash Advances

E-commerce – the soaring online retail sector – flourishes with business merchant cash advances.  Shopify expanded its business model to provide e-commerce entrepreneurs financing to kickstart or accelerate their business on Shopify.

The restaurant, retail, landscaping, tutoring, and other up-and-down industries often use and thrive off merchant cash advance financing.  Businesses in these industries experience volatile trends, often concurrent with seasonality.  Cash advances help companies recoup and stay afloat even during down cycles.

Final Thoughts

A merchant cash advance is great for a small business or startup struggling with cash flow due to seasonality, a goal of expansion, or because of a temporary financial issue.

Owners that do not qualify for traditional forms financing, like with the Small Business Association, because of a bad credit score, a poor bank statement, or too young of a business should turn to merchant cash advance financing.  With MCA, capital is quick and easy to attain. You can funnel more resources to propel your business into success in a few short days.

Investing in Merchant Cash Advances

Due to the high rate of interest on MCA contracts and the returns that MCA funding companies receive, investing in merchant cash advances can be incredibly lucrative.

For the first time, accredited investors outside of the MCA industry have the opportunity to invest in MCA funding opportunities through the use of our platform. We have essentially created a new asset class for the accredited investor. If you’d like to learn more about our platform, contact us today!

Supervest, Inc.


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