Chat with us, powered by LiveChat

What To Look For In A Merchant Cash Advance Contract

Hey there! If you’re a small business owner looking into merchant cash advances, you’ve come to the right place. I totally get it – sometimes you just need quick access to capital to keep things running smoothly. But before you sign on the dotted line for a merchant cash advance (also called an MCA), it’s really important to understand what you’re getting into. I’ve gotten a few MCAs for my business over the years, so I want to share some tips from my experience to help you make the best decision.

What is a Merchant Cash Advance?

First things first – what even is a merchant cash advance? Basically, an MCA company gives you an upfront lump sum of cash in exchange for a percentage of your future credit card sales. So it’s not a loan – you’re selling a portion of your future sales. The MCA company then takes a fixed percentage of your daily credit card revenue until the full advance amount plus fees is paid back[1].

- -

Because it’s not technically a loan, MCAs aren’t regulated like loans are. There’s no interest rate – instead there’s a “factor rate” that determines how much you’ll pay in fees. For example, a 1.4 factor rate on a $10,000 advance means you’ll repay $14,000 total[2]. Yep, crazy expensive!

Pros of MCAs

Okay, so why do people get merchant cash advances if they’re so expensive? There are some advantages:

  • Fast funding – You can get approved in as little as 24 hours and get the money quickly[3]
  • Flexible requirements – MCAs work with weaker credit and don’t require collateral[4]
  • Payments align with revenue – You repay based on a % of daily sales, so payments go down if your sales do[5]

Cons of MCAs

But there are also some big drawbacks to consider:

  • Insanely expensive – Factor rates are equivalent to 60-200% APR[2]
  • Frequent payments – Money is taken daily from your sales, hurting cash flow[4]
  • Tough to compare – Agreements don’t show APRs like loans do[5]
  • Can lead to debt cycles – Easy to get stuck needing a new MCA to repay the old one[3]

What to Look for in MCA Contracts

Okay, so if you do decide to go the MCA route, it’s really important to understand the contract terms. Here are some key things to review:

- -

Factor Rate & Fees

Factor rates range from 1.1-1.5x the advance amount. The higher the rate, the more expensive the financing. Make sure you calculate the equivalent APR so you can compare costs to loans[5].

Daily/Weekly Payment Amount

Many MCAs take a fixed daily or weekly payment from your bank account. Understand the payment amount and how long it will take to fully repay[3].

Repayment Start Date

Some MCAs take the first payment upfront. Know when daily payments will start coming out of your account[5].

Personal Guarantees

Many MCAs make the business owner personally responsible for repaying the advance. Understand your liability[4].

First Priority Lien

MCA companies get first dibs on your sales revenue until repaid. This limits your options for other financing[3].

- -

Restrictive Covenants

MCA contracts often limit your ability to open new locations, take other financing, or make refunds. Watch for clauses that restrict your business flexibility[4].

Modification Rights

Some MCAs include provisions allowing the provider to change contract terms if you violate a covenant. Make sure you understand the implications[4].

Access to Statements

Providers can access your merchant/bank statements anytime to verify sales volumes and ensure you’re following the contract. Know what they can see[5].

- -

Events of Default

Understand exactly what constitutes a default, like missing payments for X days. Default can allow the MCA company to take aggressive action like debiting your account or enforcing the personal guarantee[4].

The Bottom Line

I know how tempting fast cash can be when you’re in a tight spot! But merchant cash advances are one of the most expensive financing options out there. Be sure to read the fine print, consider all alternatives first, and consult a lawyer if you have concerns. With the right precautions, MCAs can sometimes be a viable short-term solution just to keep things afloat. But tread carefully – those factor rates and rigid terms can really catch you off guard. Let me know if you have any other questions!

Citations

[1] https://www.nerdwallet.com/article/small-business/merchant-cash-advance
[2] https://www.federallawyers.com/debt-relief/what-to-look-for-in-a-merchant-cash-advance-contract/
[3] https://fundbox.com/resources/guides/merchant-cash-advance/
[4] https://www.mondaq.com/unitedstates/contracts-and-commercial-law/1236458/merchant-cash-advances—what-you-should-know
[5] https://attorney-newyork.com/2022/10/18/what-to-look-for-in-a-merchant-cash-advance-contract/

Get Debt Relief Today

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
Leo
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
Jason
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
Mary
$350,000 MCA Restructured Over 2 Years

In The Media

Delancey Street CEO discusses ways to reward employees
Delancey Street CEO discusses the benefits of franchising on Forbes.
Delancey Street CEO discusses management on AMEX.
Best Michigan Business Debt Counselors

Best Michigan Business Debt Counselors Navigating the choppy waters of…

Best Michigan Financial Advisors

Best Michigan Financial Advisors Choosing the Right Financial Advisor in…

Best Michigan Bankruptcy Lawyers

Best Michigan Bankruptcy Lawyers Navigating the choppy waters of bankruptcy…

Best Michigan Turnaround Management Firms

Best Michigan Turnaround Management Firms Introduction Navigating financial distress and…

Best Kansas Turnaround Management Firms

Best Kansas Turnaround Management Firms Introduction to Turnaround Management Firms…

Delancey Street simply gets it. You're talking to experts.
Steven Norris
Get Help Today

Ready To Get Started?

If you have questions, feel free to shoot us an email, or fill out our live chat.

Schedule Consultation