Merchant Cash Advances – How They Work
A merchant cash advance (MCA) is a financial option for businesses that require immediate cash. An attractive feature of an MCA is the advance can be obtained quickly without the hassles of traditional bank loans. It isn’t uncommon for MCA providers to deposit cash advances into a merchant’s bank account within 24 hours of approval.
A merchant cash advance is a short-term solution that’s available to companies that generate revenue from debit and credit card transactions. MCAs provide merchants with the ability get approved for an advance on the basis of their credit card receipts.
Here’s how a typical MCA process works. Complete an application and provide proof of your daily credit card receipt transactions. A merchant cash advance provider will review your application and analyze the credit card receipts from your previous sales.
Based on this data, the MCA provider may offer your company a cash advance. You’ll repay the advance with the proceeds from your future sales receipts.
If you agree to the merchant cash advance, you’ll sign the agreement, receive a cash deposit into your business bank account and repay the MCA according to the terms. You should know that merchant cash advances aren’t cheap. You’ll be required to repay the principal amount of the advance, holdback amounts and factor rates.
What Is a Merchant Cash Advance Holdback?
With a merchant cash advance agreement, your payments will be automatically deducted from your daily credit card receipts. This is known as a merchant cash advance holdback.
The amount of money that is deducted from your future credit card receipts depends on the holdback percentage. With a typical holdback charge, you can expect to pay as little as 10 percent or as much as 20 percent per transaction. The actual amount depends on the terms of your agreement with your MCA provider.
The following example will help you understand how holdback charges are assessed in MCA agreements. You operate a high-volume deli that generated $20,000 in credit card transactions on Sunday. Your MCA provider assesses a holdback percentage of 20 percent a day. Based on the credit card receipts, the holdback is $4,000 for Sunday.
The entire amount of the holdback will be applied to your merchant cash advance balance. If your company receives a great deal of its revenue from credit card payments, the loan can be repaid quickly.
Requiring holdbacks offers a guaranteed way for merchant cash advance providers to receive cash advance payments quickly. A holdback reduces the need for providers to require collateral for merchant cash advances.
The Difference Between a Factor Rate and a Holdback
The factor rate is the percentage that a merchant cash advance provider charges for the advance. In conjunction with holdbacks, a factor rate will be assessed on your MCA. Factor rate percentages can range from double to triple digits. This rate causes a merchant cash advance to be an expensive source of cash.
When merchant cash advances include factor rates and holdbacks, the repayment amount can be as much as 40 percent of the amount of your advance. At that rate, you’ll pay as much as $4,000 for a cash advance of $10,000.
Is a Merchant Cash Advance Right for Your Business?
Although MCAs offer a quick way to get money, you should carefully weigh the pros and cons before you sign a contract. Taking this action will help you make a wise choice.
Take a moment to think about the reason you need the money. Do you need access to cash for a short period of time? If so, an MCA may work for your business. If your financial need is due to revenue problems, it might be wise to consider other types of business loans.