What is a Merchant Cash Advance?
A Merchant Cash Advance is a type of transaction where the lender buys a percentage of your future revenue. You receive a lump sum from the lender and your repayments are based on your daily sales. The more sales you, the more you pay. You do not have to pay it back if your business shuts down. In this article, our provide detailed explanations to answer what is a Merchant Cash Advance.
Pros of a MCA
You do not need to have a good credit score to qualify for a MCA. The initial application is simple if you have all the required documents. The process is fast and this may be an advantage if you need cash urgently.This can be used for a variety of different businesses.
Cons of a MCA
The APR (Annual Percentage Rate) is very high and your business is paying more in the long term. You do not have access to all your daily sales funds because of the automatic regular deductions by the lender. It is difficult to change from one MCA lender to another.
Types of Merchant Cash Advance
There are different types of MCA like :
Merchant Cash advance through which deductions are made daily as a percentage of your sales and approval time for funding is as little as 7 days.
Financing via invoice – the lender will advance you 50% to 90% of the value of your outstanding invoices and you payback when customers pay you. Takes as little as 24 hrs to get funding
Short Term Business Loan – Receive advance and you make payment within 3 to 18 months. APR is a minimum of 14%
Methods of Payment
There are different methods of MCA repayments :
Split Withholding – Payments are automatically deducted by the credit card processor and paid to the lender
Lock Box or Trust Account Withholding – all credit card payments are received by the lender who deduct their payment and transfer the balance to the business account.
ACH (Automatic Clearing House) Withholding – This is an automatic debit from the business account.
There are two types of payment structures:
Sales Structure – The payment is based on a percentage of your daily sales and will fluctuate as per your sales. This may prolong your repayment period.
Loan structure – This is a fixed payment structure and is established from past sales and payments do not fluctuate according to sales.
Costs of a MCA
MCA interest rates are based on a factor rate. For example, if you take an advance of $20 000 with a factor rate of 1.2 you would pay back $24,000 and your total interest cost will be $4,000.
It may seem like a good deal however you need to look at your APR (Annual Percentage Rate). In addition to the factor rate you need to take into consideration, there are other fees such as administration costs. Make sure you understand all the additional fees before signing a Merchant Cash Advance agreement.
Time to Pay Off a MCA
Most MCA’s are paid off from 3 to 12 months depending on the type of MCA. If payment is made as a percentage of your sales then it will be difficult to determine how long it will take to pay off the advance. It is advisable to pay off any business loan as soon as possible.
Merchant Cash Advance Debt
Keep in mind that Merchant Cash Advances debt can become burdensome. If you have found your self in an unfortunate situation of not being able to keep up with your payments, our attorneys can help. Schedule your free consultation today to find out more about: