First and foremost, a merchant cash advance is a non-traditional loan derivative that provides a business with necessary funds in exchange for a percentage of future sales – this is the most basic, stripped-down assessment. The delivery of this “loan” can come in the form of cash; after which the lender will deduct debits from your bank periodically (daily, weekly or monthly, usually), in accordance with the loan terms you signed.
For a quick example of what you can expect with a merchant cash advance, if you request $50,000 and are able to secure a factor rate of 1.4, then the total amount you eventually payback is $70,000 – which amounts to fees of $20,000 for the loan term.
What Are Some Reasons for Securing Merchant Cash Advances?
There are several good reasons that borrowers will seek a so-called MCA: first of all, you can secure one relatively quickly when compared to the long processes involved in other loan types; a quick look at your business credit card(s) may be all a lender needs to see in order to deliver your funds within 5 business days.
Additionally, as a form of unsecured credit, you needn’t worry about collateral in the case of an MCA. Of course, defaulting may place your personal creditworthiness at risk. Since the lender takes your daily income into consideration with an MCA, another overlooked benefit is how your debit can vary – in seasons of low sales, the lender will often reduce your payments.
What Are Some Reasons to Think Twice About an MCA
As a fairly standard type of loan, there isn’t too much variability with an MCA. The annual percentage rates could hit into 300% or more – although there are a variety of factors contributing to this gargantuan digit APR. The lender you choose is all-important in this case.
Additionally, the more sales you make, the more you pay, with an APR that scales up with early payment. Basically, there’s no benefit to paying off your MCA early, and you can even incur a penalty for doing so. Since there’s no robust federal regulation with merchant cash advances, you would do well to seek expert advice before opting for one.