Merchant Cash Advance Loans: the Inner-workings

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merchant cash advance loans

At one point or another in owning a business, money can get tight. For many small businesses, there are few options when it comes to obtaining working capital fast. The first place most business owners turn is the local bank. Another is a merchant cash advance loans. The bank is an excellent option if you have a good personal credit score, and have established a good relationship with the bank. This will offer the best terms and lowest APR %. But what if the bank says no? What is the next option? Most business owners find themselves exploring alternative lenders, such as Factoring, ABL, Collateral loans, MCA’s etc. Should your business consider a Merchant Cash Advance? 

Merchant Cash Advance Loans

The quickest and easiest option is usually a merchant cash advance, or MCA for short. This is the purchase and sale of a businesses’ future revenue. A business can sell a chunk of future revenues in exchange for lump sum cash up front. However, this quick funding can come at a steep cost. 

Calculating the cost of an Merchant Cash Advance Loan

An MCA is priced based on what is called a “factor rate”, instead of annualized interest. For example: a $10,000 advance at a 1.25 factor rate ($10,000 x 1.25 = $12,500 payback) or 25%. Think of factor as a percentage, if you have a factor rate of 1.32 you are paying 32% on the money you borrow. 

The term rates for a MCA are generally between 3-15 months, and require either daily or weekly payments. Daily payments are collected Monday-Friday excluding holidays in which banks are closed. 

Types of Merchant Cash Advance Loans

In some cases lenders will offer a “credit card split” in which the payments are batched directly out of credit card sales before they hit the bank account of the business. If a business generates the majority of its’ revenue from credit card sales, this can be easier for a business. Credit card splits are based on a daily or weekly percentage of total credit card sales. This means, if business slows down, the payment will be lower. It can be more flexible than a set daily payment. Many lenders favor credit card splits, because they can reduce the risk of non payment. 

MCA Loans: Is It Worth It?

If your business is considering taking a MCA the biggest question to ask is, what does the business stand to gain from the funds? The average rate for a merchant cash advance is 20%-50% based on the lenders guidelines. If it is not a “do or die” scenario for the business, then what is the R.O.I. (return on investment) of the funds? For example, if the funds are used for expansion, will the increase in future business offset the initial fee paid for the funding? If the answer to this question is no, then a MCA may not be the best option. The situation is different based on each business’ specific needs.

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