Sales are down. Now what? Do you have to keep paying if sales don’t come through? Read on to learn exactly how an MCA works and get the info you need to prevent business disruption.
A merchant cash advance is simply an investment of cash into your business. That might mean you’ll have to cough up some of your future sales to repay the money you got, but the cash is upfront and you don’t need to convince a bank of your creditworthiness to get the money you need. It’s basically a trade-off - you give up a little of your business’s future potential to get cash now. That’s all.
It isn’t a loan. In short, it’s a simple arrangement where the merchant cash advance provider purchases some of your future credit card sales receipts for a fee. That’s it. It’s called a factor rate, applied to the purchase. So it’s possible to figure out how much you’ll actually be paying upfront. This fee structure will still be determined largely by your risk level, and may take your business’s revenue history and credit score into account. It isn’t interest, though. There’s no fixed term or minimum payments, either. You keep selling, and once you’ve reached the agreed upon purchase price, you’re free.
A cut of every card sale will automatically be taken and sent to the provider until the advance is paid off completely. If sales drop for a while, say during a holiday season, you pay less back and vice-versa. No mortgage payments or college tuition here. Basically, the harder your business works to sell product, the more money will be taken.
The Repayment Schedule Is Based on Your Business Sales Revenue
So what happens when sales drop? Quick answer: Merchants are only on the hook for repayments tied to sales you actually make. When there is a quick revenue increase in daily credit card receipts, a higher amount will be remitted to the merchant cash advance funding company. When revenues decrease, the amount remitted goes down. It’s very dynamic. And what’s the repayment frequency? Daily? Semi-weekly? Bi-weekly? Weekly? Monthly? None of the above. The repayment schedule is based on your business sales revenue. Sales = $0, Repayment = $0.
And here’s the bad news: you still owe your advance. It just takes longer to pay. But that’s okay. Since your cash advance depends on revenue from credit card transactions, only servicing a portion of those credit card transactions means you’ll take longer to pay. But there’s no worry about not hitting a monthly payment. Your payments will automatically decrease, but you still owe the balance. It might take longer to repay your total advance. That’s how it works. If sales come back in, you’ll pay the balance even faster.
Picture a slow month. Sales don’t flow in as much. The days pass, and you still owe that money. Will your funding company cut you loose after a slow season? No, the transactions would just slow and your balance would be dragged out longer. This means that the amount of your advance isn’t reduced. The repayment period is extended. While it may take longer to repay the advance, you are “paying it back.”
Personal Guarantee
Then there’s the personal guarantee. You might not have to personally repay the advance as a loan, but you may have signed a personal guarantee. So if sales are dry and you never do pay off the cash advance, your own personal finances could be on the line. It depends on what the guarantee and advance’s contract says, but there’s always a possibility. If you’re reading this article, be sure and factor that in!
What if you have to close? If your business is shut down and dissolved, you’re off the hook. Reopen it, though, and you owe again. Fraudulent accounting practices can also get you in trouble.
Will this hurt your credit? No. It won’t help, either. There’s no hit on your credit score, positive or negative, from taking out a merchant cash advance. There’s no minimum credit score needed to qualify.
It isn’t your only choice, though. There are other financing options like a line of credit, term loan, or bank loan. All are potential options, and each has pros and cons. But this post isn’t about explaining how different financing options work. It’s about explaining what happens when you take on a merchant cash advance and sales go down. Start with your contract. Read and read again. How much do you owe? What are the payment requirements?
Put more simply, a merchant cash advance is a type of funding that is advanced based on future merchant card sales, where a percentage of the sale is removed from each sale daily and sent to the merchant cash advance funding company until all funds are repaid. If sales decrease or stop completely, then the amount of the repayment amount decreases.
If sales have dropped and you’re worried, don’t stress. It happens. Breathe, and then find out your options.
