Small Business Funding – Understanding the Merchant Cash Advance
The merchant cash advance (MCA) has been the subject of much controversy and confusion in recent years which may have discouraged some business owners from considering it. This is unfortunate, as merchant cash advance can be a viable option for businesses in need of working capital and it offers advantages over a traditional bank loan.
What is a Merchant Cash Advance?
A merchant cash advance, often referred to as an MCA, is not a loan. It is the sale of future receivables. With an MCA, the merchant consents to sell an agreed-upon amount of future credit card revenues at a discounted rate. This discount is primarily determined by the risk and expected time for the funds to be recovered. For example, if a merchant agrees to sell $65,000 dollars of future credit card revenue with a factor rate of 1.3 percent, they would receive a lump sum of $50,000 dollars. The merchant gets the upfront capital they need and the MCA provider will receive a percentage of the merchant’s credit card sales until the amount of credit card revenue sold has been reached.
The percentage of credit card sales received by the MCA provider is called a “holdback” or “retrieval rate” and is typically between five and twenty percent. This rate is based on the size of the advance, the volume of credit card revenue and the repayment terms. The MCA provider will review three to six months of credit card receipts to determine the amount the merchant is eligible to receive. The terms vary but normally span no longer than two years.
Merchant Cash Advance Benefits
Access to Quick Capital
The need for additional capital can arise suddenly. It could be an equipment breakdown or an unexpected business opportunity. Whatever the reason, an MCA can provide funding much faster than a traditional bank loan. In most cases, the merchant can be approved in hours and receive funding in just a few days; in certain cases, same day funding is available.
MCA providers will review the merchant’s credit history. However, the ability to qualify is based mainly on the length of time the business has been open and the consistency of credit card sales, as that will be the source of repayment.
Flexible Repayment Amounts
Unlike a traditional loan, there is not a set monthly payment. Payments are deducted from the daily credit card sales and calculated according to the agreed-upon retrieval rate. For example, at a rate of 15 percent with $3000 dollars in sales, the payment would be $450 dollars. If the sales totaled $5000 dollars, the payment would be $750 dollars. Depending on the MCA provider, these payments are collected one of three ways:
- Split withholding: Payments will be made automatically through the merchant’s credit card processor. They split the revenue received and send the MCA provider’s percentage directly to them. The remaining revenue would be sent to the merchant’s business account.
- Lockbox withholding: Credit card revenue is sent to a special bank account that is opened in the merchant’s name. The MCA provider will have partnered with the bank so that if they provide appropriate contracts their “split” will be automatically sent to the MCA company and the remaining revenue will then be automatically forwarded to the merchant’s regular business account.
- ACH withholding: The MCA provider’s percentage is automatically deducted from the business account via ACH which executes an electronic transfer of funds between bank accounts.
You’re in Control
With a merchant cash advance, there are no limits on how the funding is utilized. It can be used for new equipment, expansion, marketing or any other business need. With traditional bank and SBA loans, there are often restrictions or covenants that dictate how the funding can be spent.
At CapFlow Funding Group, our team of professionals will help evaluate each business’s unique situation and help you determine which funding option would best the company’s needs. In addition to merchant cash advances, we specialize in factoring and other methods of small business funding. Contact us today!