What is a Merchant Cash Advance (“MCA”)?

For a quick, one-time capital infusion into your business, the merchant cash advance (“MCA”) is an excellent option. MCAs, also known as credit card receivables funding, are a form of cash flow financing. The structure of an MCA is a lump sum of capital up front, in exchange for a fixed payback amount. Payments returned to the funder are received in the form of a fixed dollar or percentage of revenues (effectively a royalty) until the agreed upon repayment amount is met.

Payments are withdrawn directly from the bank account, on a daily or weekly basis, or remitted directly by the credit card processing company. The business’ cash flow (bank deposits or credit card processing volume) is the basis for funding as an option for short-term financing. As collateral is not required with a MCA, it is a suitable option for companies with few assets.

With same-day funding available, the typical turnaround for an advance is 2-3 business days. Often, deals under $100,000 are funded on the same day.

Benefits of an MCA

Merchant cash advances have many benefits. First off, MCAs are highly flexible, accommodating cash flow needs. Lower credit scores are not an issue, as the minimum FICO requirement is 500. Securing an MCA also helps re-establish and improve your credit score. Funding is secured by future cash flow, so if you have a solid cash flow but no assets, you can still qualify. Additionally, securing an MCA requires little stipulation compared to bank financing.

To obtain an offer, an application and four months of bank statements are required. If you process credit cards, your merchant statements will be requested as well. The financing company will require minimal documentation in order to close: a driver’s license, proof of ownership, and a void check. For larger deals, additional information such as your financial statements will be required.

MCA versus other options

When considering funding, it is good to bear in mind that equity is the most expensive option. Equity requires that a percentage of profits and losses are shared with your investor indefinitely. For MCAs, payback is provided as a fixed royalty for a fixed period. It’s perfect for high growth companies, capitalizing on opportunity, preventing disaster, or bridging your business to busy season. However if you are simply delaying the inevitable and your business is in a downward spiral, an MCA can hurt your cash flow significantly. So be careful!

Opting for a MCA is popular for many reasons. Purchasing inventory at volume in order to receive discounts can be completed quickly with an MCA. Having a short-term financing option on-hand for emergencies such as equipment failure can keep operations running smoothly.

Merchant Cash Advance Rates: Explained

merchant cash advance ratesIf you’re a small business owner, you’ve probably received a fax, e-mail or phone call about obtaining a “merchant cash advance”. Merchant cash advances are a form of business funding that should, in theory, fall between a loan and an investment. Because it’s not a loan, there is no “interest” associated with it. Instead there is a fixed payback. The fixed payback is often determined by a “factor rate”, which can be deceiving because A/R factoring is not involved. What follows below is a quick explanation of this funding mechanism and how merchant cash advance rates are calculated.


What is a Merchant Cash Advance?

A merchant cash advance is an advance of future business revenues. The funding company will purchase a fixed amount of your future revenues, for lump sum cash up front. A sample deal would be a purchase of the next $13,000 of your revenues in the future, in exchange for $10,000 right now. The funding amounts are largely based on cash flow, like total monthly credit card transaction volume or business bank deposits. Payback would be a fixed % of all future moneys that come in – explained in more detail below. Learn more about the merchant cash advance, also known as cash flow funding.

Merchant Cash Advance Rates

In the above example, the merchant cash advance fees would be 30%. The total repayment on $10,000 would be $13,000. This would be a “factor rate” of 1.30. To calculate the total payback on the funding amount of $10,000, multiply the funded amount by the factor rate ($10,000 x 1.30) to obtain the payback. The payback is often called the purchased amount.

Many people tend to annualize the fee as an APR but this is incorrect. First, it is not a loan so calculating an interest rate is inherently faulty. Secondly, because the funding company is only receiving a fixed percentage of all future moneys as repayment on the advance, the length of time they will collect is often unknown. For example, if the funding company says “I will pay you $10,000 right now, in exchange for the next $13,000, and you will pay me back 10% of every credit card swipe, until I get my $13,000, no matter how long it takes”.

If tomorrow you have a huge downturn in business and your daily credit card volume drops from $1,000 to $100, the funding company will be taking 10% of $100, not $1,000. Similarly, if your business started to boom and you started to process $2,000 per day in credit cards, the funding company would receive $200 per day. Again, the length of repayment is unknown, so it’s not correct to calculate an APR based on merchant cash advance rates. The reason why is that you don’t know how long it will take to pay off.

Merchant Cash Advance Rates: Cheat Sheet

Moving forward, keep these things in mind if you’re shopping for a merchant cash advance:

  • The payback is called the “factor” rate, which is fixed.
  • The funded amount is the “advanced” amount.
  • The repayment amount is the “purchased” amount
  • Repayment is done by remitting a portion of every sale until the purchased amount is met.
  • The portion of every sale paid back will be either 1) a fixed percentage of your daily credit card revenues, or 2) a fixed dollar amount debited directly out of your bank account.

Look for Hidden Fees

Fees increase the overall merchant cash advance rates the factor rate sticker price. Look for an Addendum or Appendix to the agreement that detail the fees. These are usually buried in the back of the contract. Ask your broker representative or the direct funder what you will be charged for and don’t move forward until you have a clear idea of what the fees are. If you’re working with a broker, look for a fee that says “PFS” or “Professional Services Fee”. This is basically a finders fee and is usually placed on top of the commission the funder is paying the broker. Push back on the fees, they’re often times egregious – especially if your funder is located on Pearl Street or in New Jersey!