If an entrepreneur needs swift access to funds in order short-term need for capital, often times he or she can leverage their credit card merchant account to access funds. A merchant cash advance (MCA) is a form of alternative lending and boasts a short turn around time. Drawn to this characteristic that are not offered by traditional lending, many small businesses enter into Merchant Cash Advance agreements without know exactly how it works. The harsh reality is that everyday we encounter companies that are stuck in a cycle of debt simply because they did not have sufficient Merchant Cash Advance information. Our experts at ZocLaw.com, in this article, provide more Merchant Cash Advance information.
What is a Merchant Cash Advance?
A merchant cash advance is not defined as a business loan. Instead, it is a cash advance based on the credit card sales of the company.
Merchant cash advance providers evaluate risk and weight credit criteria differently from traditional lending institutions. An MCA provider examines the daily credit card receipts to ascertain if the business can pay back the funds in a promptly. By entering into a Merchant Cash Advance agreement, you are “selling” a percentage of your future credit card sales to acquire capital immediately.
Rates on a merchant cash advance are most likely much higher than other financing options. As such, most companies find themselves in severe financial conundrums. It’s crucial that business owners understand how Merchant Cash Advances work.
How Does a Merchant Cash Advance Work?
An Merchant Cash Advance is initiated when a small business owner and a lender agree on the advance amount, payback amount, holdback and term of the advance. Upon signing the agreement, the advance is transferred to the business’ bank account in exchange for a future percentage of credit card receipts.
The “hold back amount” is the agreed of the daily credit card receipts are withheld to honor the agreement. Be very wary that the lender will require access to your account in exchange for waiving the collateral – if you default, this can be very problematic.
Repayment is structured so that a percentage of the daily balance in the merchant account makes up the payment for that day. As such, the more credit card transactions a business does, the faster they’re able to repay the advance. On the contrary, should transactions be lower on any given day, the draw from the merchant account will also be less.
Repayment and Loan Costs
Typically, a business that uses a merchant cash advance will pay back 20% – 40% or more of the amount borrowed. This percentage is the factor rate.
It is important to understand the difference between the holdback amount that a small business pays every day (as a percentage of their sales receipts) and the repayment amount for the advance. There could, for instance, be a holdback of 20%, and a repayment of 40%, so it’s important for business owners to be very clear about this distinction.
The holdback percentage is based on:
- The amount of funds a business receives,
- How long it will take to pay back the money, and
- How volume of credit card sales.
Entering into a Merchant Cash Advance agreement should not be taken lightly. The business debt relief lawyers have helped many businesses that are overwhelmed with debt as a result of ambiguity related to the Merchant Cash Advance Agreements. Our clients have sought out legal counsel for:
- Confession of Judgment
- Personal Guarantee
- Merchant Cash Advance Default
- SBA Loans
- Chapter 11 Bankruptcy
For more Merchant Cash Advance information, speak to one of our experienced business debt relief lawyers today.