How a Merchant Cash Advance Works
The key to a MCA relationship is allowing the MCA Company to begin receiving your credit card receipts through their bank first. This ensures that all payments processed will first have a percentage of those receipts deducted as repayment before transmitting those funds to you.
For example, if you were looking for a lump sum payment of $20,000, you would likely sell $25,000 of your future receivables to the MCA provider. The $5,000 that is “lost” is your cost of the loan which is a hard cost, not necessarily an “interest rate” although you can calculate an effective interest rate based on how quickly that money is paid back.
Benefits of a Merchant Cash Advance
Despite some of the high costs, there are some inherent benefits to businesses that make a big difference.
The first is that the payments terms of the MCA are tied to the rate at which you get paid. In other words, there is no set monthly fee or payment like a traditional loan or credit card payment. Both you and the MCA provider agree to a percentage of revenues that they will take from every transaction until the advance is paid off. This can be particularly helpful if the amount of time it takes to get paid back winds up being longer than you thought it would be (it always is).
The other advantage is of course speed. Many MCA providers claim to make funds available within 48 hours, although 7 days is a more likely turnaround time. Still, this is significantly faster than a traditional bank can extend credit.
How Much does it Cost?
That’s the rub. MCA loans are not your cheapest option; they are usually your fastest option. Rates can start at 10%, although 30% is a much more likely average that you’ll pay. The caps on these rates can go as high as 100% in effective interest; so once again, they are not the cheapest option.
How can I Qualify?
MCA loans are designed to be easy to qualify for if you have a consistent history of credit card receipts, usually going back at least 3 months, and preferably 6. That “look back” period will vary based on the needs of the MCA provider.
The MCA provider is going to be most interested in knowing that your receivables will be collectable in the future. If there are obvious health problems in your business that may prevent you from continuing to operate after the loan is advanced, that will certainly be a problem. So proving that the business is certainly viable on a go-forward basis is critical.
While MCA funding is often associated most with the high cost of capital, it’s still an incredibly useful tool for small business owners trying to address short term cash flow solutions. Knowing how well the business can sustain the loss of receivables is directly proportionate to the value of the loan. In cases where you know the business can balance the needs of the loan with its costs, it’s definitely a viable option.