A merchant cash advance (MCA) is not a traditional business loan.

MCA companies offer struggling businesses a lump sum of cash in exchange for the business’ accounts receivables, meaning its cash flow.

MCA companies will take a daily percentage of the business’ revenue and/or its credit card sales directly from its bank account and/or merchant accounts until the MCA company is paid back. This is all done at an extremely high rate of interest.

Theoretically, the MCA industry bridges a gap for businesses in need of quick capital but unable to qualify for traditional loans. However, the high cost of doing business with a MCA company means that all businesses must be extremely careful when using this financing option.

Here is an overview of the MCA process:

The Application Process

  • A business provides an MCA company with basic information about itself and its operations, including its cash flow.
  • MCAs applications are regularly approved; approval rates are high, around 84% in 2020, making them accessible to businesses with poor credit.
  • The application and funding process is fast, often within 24-48 hours.
  • More online lenders and fintech companies are entering the MCA space, streamlining the process; the MCA industry has grown rapidly, with an estimated market size of over $20 billion.

The MCA Agreement

  • MCA Agreements are not loans but, effectively, sales agreements.
  • A business agrees to sell its receivables (its future income) to a MCA company, which receivables are liened along with other assts. A MCA company usually also personal guarantees from the business’ ownership.
  • The business then receives a lump sum from the MCA company typically ranging from $5,000 to $500,000.
  • The business remits a fixed percentage of its daily credit card sales until the advance and fees are fully repaid.
  • Repayment is tied to the business’s sales volume, so payments fluctuate based on cash flow.
  • The total repayment amount is determined by a factor rate (for example, 1.2 to 1.5) multiplied by the advance amount, rather than a flat interest rate.

Repayment Terms

  • MCA Agreements have notoriously high effective interest rates, often from 30% to over to 350%.
  • Daily or weekly remittances are required, which can quickly strain the business’ cash flow, and can lead to operational failures.
  • MCAs are debt traps and, if used excessively, a business can find itself with little or no remaining cash flow to operate.
  • Some businesses can find relief from MCAs through Chapter 11 bankruptcy plans of reorganization.

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