Merchant Cash Advance (MCA)

With a merchant cash advance (MCA), a business can sell its future credit card receipts in exchange for a lump sum amount today.  The MCA provider uses a percentage of the business’s credit card receipts to pay for the transaction.  It is not a loan because the provider is buying receivables.  Business funding with this type of cash advance is becoming more popular as banks tighten their lending requirements.

The terms of a merchant cash advance will typically include:

·        Fees

·        The percentage of receivables to be used in repayment

·        Restrictions on changing credit card processors

·        A minimum level of monthly credit card receipts

·        No additional collateral

·        No personal guarantee

Factors to consider before engaging in a merchant cash advance:

·        Who am I doing business with and what are their credentials?

·        Is this the best deal with the best company?

·        What is the total cost of the advance including fees?

·        What is the effective interest rate when all costs are factored in?

·        If my business cash flow is in trouble now why would taking a high cost advance help me?

·        What is the impact of having to pay for the merchant cash advance within the typical period of 6 to 12 months?

There are so many new companies getting into this business with essentially no regulation that it really pays to shop around for the best deal.  Take your time because it is not impossible for the effective interest rate of a transaction to be over a hundred percent when the fees are included in the cost of the “loan” – as they should be.

Be sure you are dealing with a reputable firm and are willing and able to pay the relatively high costs in exchange for accelerating your cash flow by 6 to 12 months at a relatively high cost.  These business cash advances require little documentation, can be processed quickly and require no other collateralization.  That makes them tempting…maybe too tempting.

It would probably be unwise, for example, to fund a long-term capital project with such short-term money.  That might be the time to apply patience and look for other, more traditional forms of asset-based lending.