A merchant cash advances, or MCA, is most commonly used to support small businesses who either don’t want a traditional bank loan or can’t qualify for one. Although MCAs may be more expensive than other financing options, they are relatively easy to qualify for and can help business owners with maintaining cash flow.

What’s an MCA?

A type of unsecured, short-term financing, MCAs are offered by financial institutions. Financial institutions provide a sum of cash upfront in exchange for a specified percentage of sales over time through and determined by, credit and debit card transactions. This money can then be used to cover payroll, product purchases, operating costs, or simply float the business during a slow season.

The Pros and Cons

On the one hand, MCAs carry very high approval odds. Financial lenders will determine eligibility based on your industry, the age of your business, and your sales history. MCAs are a great option for businesses with high volume credit and debit card transactions and because you pay a percentage of your sales, your payment amount will follow the flow of your business. When sales are high, your payment will be high; however, when sales are low, your payment will be low to accommodate the flow of business.

Consequently, they are expensive. MCAs carry a flat fee, based on a factor rate, so early repayment doesn’t save you money. Because they are not federally regulated, contract terms, jargon, rates, and descriptions make MCAs very difficult to understand, but very easy to misuse. Due to their complicated nature, MCAs carry a high possibility of incurring further debt. Having multiple MCAs, or “stacking”, leads to multiple payments coming out of your daily credit and debit sales which can lead to more and more debt. 

The True Cost

There are three contributing costs to MCAs:

the cash advance (this is the sum requested),
the repayment amount (the overall cost/payback amount), and 
the holdback rate (the percentage of sales used to pay back advance).

Because MCAs are not traditional loans, they do not charge interest as a way of making money. They use a factor rate to determine how much you owe in repayment. Factor rates range from 1.1 up to 1.5 and are based on your business’ industry, health, and history. To calculate the total repayment amount, take the advanced sum and multiply it by the factor rate. 

For example: $20,000 borrowed with a 1.2 factor rate. $20,000 x 1.2 =$24,000. The cost of the MCA is $4,000 and the total repayment amount is $24,000.

The hold-back rate determines how much of your daily sales will go towards repaying the MCA. For example, if you have a 15% holdback rate, 15% of your daily credit and debit card sales will go towards repayment. Hold back rates vary between 5% and 20%.

Although payments will fluctuate based on business volume, it’s important to carefully think through all lending options when seeking funding for your small business. MCAs can be an amazing option for small businesses when chosen cautiously, with a good lender. Contact Hornet Capital Solutions today so we can discuss your lending needs.