Merchant cash advances, or MCAs, is a financing strategy that allows business to borrow money that is later repaid through their credit card sales. They are notorious expensive, carrying three-digit annual interest rates and come a repayment schedule that often leads into a debt trap forcing business to either refinance with yet another MCA or filing for bankruptcy.

Whether or not MCAs are right for your business depends on a number of factors, including business volume and are generally reserved as a last for resort for emergency financing. 

What are MCAs?

Merchant cash advances are a form of alternative lending generally, used by big businesses who received the majority of their sales/transactions through credit cards (e.g., restaurants, retail shops, etc). Businesses are given cash in exchange for a percentage of future credit and debit card sales. It’s important to note that although money is being borrowed, MCAs are not considered loans in the traditional sense of the term.

How do MCAs Work?

Money is paid out similar to other lending and financing options; however, repayment schedules are structured in one of two ways. The traditional way involves repayment based on an agreed upon percentage of business sales received through credit card payments. The second repayment option paid through fixed weekly or daily payments.

As stated earlier, MCAs are very expensive and carry interest rates somewhere from 40% all the way to 350%. Fees are based on a risk factor assessment scale ranging from 1.2 to 1.5. For example if you borrowed $50,000 and had a risk factor of 1.2, you would multiply $50,000 by 1.2 which would equal $60,000. You would owe  $10,000 in fees which would result in a total of $60,000. The higher the risk factor rate, the higher the fees and cost of the overall MCA. 

Pros & Cons

MCA’s are quick. You can receive approval within a week and lenders don’t consider your business’ credit history. Since repayment is based on your sales, there is no collateral involved and when your sales are low, following the traditional repayment structure, your payment will be low as well.

However, MCAs come with serious set backs. In addition to the high interest rates, there is no benefit of paying off your borrowed balance early. The terms and agreements surrounding MCAs are notoriously confusing and lack legal protection for the borrower. It is also impossible to compare APRs between financial companies due to the, often biased, rating scale and overall, this form of lending lacks federal oversight. 

If you are considering using MCAs, reading the terms and making sure you understand them is imperative. If you are unsure of anything, consult a professional. If you are still unsure of how MCAs will impact your business, contact us, Sterling Capital Consulting so we can further discuss your business’ financial needs.