There is significant ambiguity associated with MCAs. Lenders claim that they are not business loans because borrowers sell a portion of their future sales in exchange MCAs for upfront payment. Although MCAs were originally designed for retailers and companies that mostly have credit card sales, the product has evolved into being able to finance almost any type of future sales revenue.
How does a merchant cash advance work?
Cash advances are simple. The lender analyzes your company sales and determines how much they can give you and how much you have to pay back. The payback amount is usually calculated using a “factor” that is multiplied against the funds provided.
Factors range from 1.09 to 1.50. However, these may vary significantly. For example, if you get $100,000 with a 1.06 factor, the payback is $106,000 ($100,000 x 1.06).
Next thing to consider is the payback time. The time period to pay back your loan can vary from three months to 15 months. Experts state that longer paybacks have “higher factor rates.” However, risk determines factor rate. As such, you could potentially have a 1.60 factor rate and a three-month payback.
How does repayment work?
The way you repay cash advances varies based on the type of sales you are financing. There are a few options available:
- For general sales, the cash advance company gets paid by making a daily fixed amount debit from your business bank account.
- For those lenders who are financing credit card sales, the cash advance is paid by sharing daily revenues with the cash advance company. The rate of payment is the “retrieval rate,” and can range from 3% to 15% of your sales. This means that 3% to 15% of your daily sales go to pay the cash advance until the debt is paid off.
Why Are MCA’s Not Ideal for Startup Funding?
They are costly
If compared to traditional lines of credit, in the long run, MCAs can be very expensive.
They provide a temporary solution
This product offers a temporary cash solution and problems arise when businesses utilize MCAs as a permanent strategy.
It may not be for all types of businesses
Although MCAs are not term loans, these products are very similar. You receive an immediate cash injection and then make regular payments until both the funds and the interest is paid back. This process may be very useful for some types of cash issues but do little to help if you have recurring cash flow problems.
The sale of future sales a high risk option
Future sales are very unpredictable. No one knows what is going to happen. Not being able to pay back your MCAs may lead to significant financial hardship.
The lawyers at ZocLaw.com have assisted many businesses create an effective strategy for MCA debt. We can also help with: