The MCA merchant cash advance 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 MCA Merchant Cash Advance?
An MCA merchant cash advance 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 MCA provider’s percentage of credit card sales, called a “holdback” or “retrieval rate,” typically ranges 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.
MCA 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 receive approval in hours and funding in just a few days; in certain cases, same-day funding is available.
Less-Than-Perfect Credit
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. The provider deducts payments from the daily credit card sales and calculates them 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, you can collect these payments in 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 funder sends the remaining revenue 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. If they provide appropriate contracts, they will automatically send their “split” to the MCA company. They will then automatically forward the remaining revenue to the merchant’s regular business account.
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ACH withholding: The MCA provider automatically deducts their percentage from the business account via ACH, executing an electronic transfer of funds between bank accounts.
With A MCA Merchant Cash Advance, You’re In Control
With an MCA merchant cash advance, you can use the funding without limits. You can use it for new equipment, expansion, marketing, or any other business need. Traditional bank and SBA loans often have restrictions or covenants dictating how you can spend the funding.
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!
