MERCHANT CASH ADVANCE

What is a merchant cash advance?

A merchant cash advance has historically been for businesses whose revenue comes primarily from credit and debit card sales, such as restaurants or retail shops. Now, merchant cash advances are available to other businesses that don’t rely heavily on credit card or debit card sales.

Merchant cash advance repayments can be structured in two ways.

You can get an upfront sum of cash in exchange for a slice of your future credit and debit card sales, or you can get upfront cash that is repaid by remitting fixed daily or weekly debits from your bank account, known as ACH, for Automated Clearing House, withdrawals.

This option has become the most common type of merchant cash advance, according to Sean Murray, a former merchant cash advance broker and founder of trade magazine deBanked. They’re referred to as ACH merchant cash advances and allow providers to market to businesses that aren’t primarily tied to credit and debit card sales.

Instead of making one fixed payment every month from a bank account over a set repayment period, with a merchant cash advance you make daily or weekly payments, plus fees, until the advance is paid in full.

How much you’ll pay in fees is determined by your ability to repay the merchant cash advance. The merchant cash advance provider determines a factor rate — typically ranging from 1.2 to 1.5 — based on its risk assessment. The higher the factor rate, the higher the fees you pay. You multiply the cash advance by the factor rate to get your total repayment amount. For example, an advance of $50,000 that carries a factor rate of 1.4 represents a total repayment of $70,000, which includes fees of $20,000.

Total advance

Factoring rate

Total fees

Total repayment

$50,000

1.4

$20,000

$70,000

MCA repayment structures

Here's a more detailed breakdown of how merchant cash advance repayments can be structured:

Percent of credit card sales

The merchant cash advance provider automatically deducts a percentage of your credit or debit card sales until the agreed-upon amount has been repaid in full. Let’s say you need $50,000 to purchase a new oven for your restaurant. You apply and get approved for a merchant cash advance of $50,000. The provider has assigned a factor rate of 1.4 on the contract, so you owe $70,000.

The repayment period typically ranges from three to 12 months; the higher your credit card sales, the faster you’ll repay the merchant cash advance.

In this case, let’s say your merchant cash advance provider deducts 10% of your monthly credit card sales until you’ve repaid the $70,000, and your busy restaurant averages $100,000 in credit card revenue per month. You’d repay $10,000 monthly, with daily payments of $333 in a 30-day month. At this pace, you’d pay off the advance by the seventh month. But if your revenue dropped to $70,000 per month, you wouldn’t repay the merchant cash advance in full until the 10th month, paying $233 daily.

As we explain below, the speed with which you repay your loan is a factor in determining your APR and can help drive it into the triple digits.

The predetermined percentage of sales is an estimate based on your projected monthly revenue. Since your sales can fluctuate, the speed with which the loan is repaid could be longer or shorter than expected, says David Goldin, CEO of Capify, president of the Small Business Finance Association, a trade association that represents merchant cash advance companies.

Fixed daily withdrawals

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This kind of agreement lists a daily or weekly payment to be withdrawn, based on an estimate of your monthly revenue. For example, a business with $100,000 in monthly revenue would owe $333 per day or $2,331 per week based on a percentage of sales of 10%.

Unlike the repayment structure tied to credit card or debit sales, your payment does not fluctuate with your sales. That means you’ll pay the same amount regardless of whether sales are down or up.

Calculate the cost of a merchant cash advance

Your annual percentage rate represents the total borrowing cost of your merchant cash advance, including all fees and interest. This figure also depends on how long it takes you to repay the advance in full.

Why borrowers opt for MCAs

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Although merchant cash advances are a financing option of last resort, they do have their pluses:

  • They’re quick. You can often get an MCA within a week or so with no heavy paperwork. Providers look at a business’s daily credit card receipts to determine if the owner can repay.
  • Physical collateral isn't required. MCAs are unsecured, so you don't need to provide physical collateral. This means you don’t have to supply business assets upfront to back your financing — and risk losing those assets if you can't afford to repay. However, the MCA provider will likely require a personal guarantee, which is a written agreement that makes you personally responsible for repaying the advance. If this is the case, the MCA provider can recoup any losses in the event that you can't pay.
  • When sales are down, your payment may be too. When the repayment schedule is based on a fixed percentage of your sales, repayments adjust based on how well your business is doing.

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