An MCA, otherwise known as a merchant cash advance, is a distinctive form of funding compared to a regular small-business loan. This type of financing gives you a sum of money up front, which you pay back with a portion of your credit and debit card deals plus a fee.
MCAs are best for small businesses that require funds right away to make up for cash-flow deficiencies or short-term costs.
The following is an overview of merchant cash advances, how they operate, and what to consider before selecting one for your business.
How an MCA Works
An organization that offers a merchant cash advance gives your business a lump sum of money, however, it is not a loan. Rather, they are purchasing your future sales, which will be utilized to repay the funds and fees.
Merchant cash advance repayments can be set up in two ways:
Percentage of sales
This is the traditional approach to an MCA, in which the merchant cash advance provider deducts a daily or weekly fraction of your credit and debit card sales until the advance is completely paid off.
Unlike other kinds of business loans, merchant cash advances do not have fixed payment terms. The time period for repayment is based on your sales and can range from three to eighteen months; the higher your credit card sales, the quicker you repay the advance.
Fixed bank withdrawals
The amount of the fixed repayment is calculated from a projection of their monthly revenue, and the money is taken out of the account on a daily or weekly basis no matter how much sales income is earned.
This approach to MCA repayment provides business owners with the ability to accurately figure out how long it will take to reimburse the loan, depending on the sum borrowed, and can be more suitable for companies that don’t rely largely on credit and debit card sales.
Rates and Fees for Merchant Cash Advances
Instead of a traditional interest rate, merchant cash advance companies charge a factor rate. Factor rates typically range from 1.1 to 1.5, depending on the assessment of your business.
Factor rates usually depend on:
- Industry you are in
- Years of operation
- Business financials
- Bank transactions
- Personal credit score
Companies with a greater likelihood of defaulting on a loan will most likely be charged a higher factor rate, leading to higher overall costs. Furthermore, the factor rate does not include any other fees that the merchant cash advance provider may impose, like an administrative or underwriting fee, which will add onto the total sum of the financing.
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