Merchant Cash Advances (MCAs): A Simplified Overview

An MCA is a funding option for businesses, particularly those with bad credit or no established business credit. Often known as alternative small business financing, MCAs have both advantages and disadvantages compared to traditional bank loans.

How It Works:

An MCA provides a lump sum of cash to a business owner based on their expected credit or debit card sales. Repayment is taken from a percentage of future credit card transactions over a specific period, withdrawn daily or weekly from the business’s card processing account.

Purpose:

The goal of an MCA is to boost a business’s cash flow. However, since future card sales are used for repayment, it reduces the business’s future cash.

Caution:

MCAs are among the most expensive forms of business financing, and financial advisors recommend using them as a last resort due to their high costs.

Types of Businesses:

MCAs work best for businesses that have high volumes of credit card sales, especially those with seasonal cycles.

Cost Calculation:

Unlike traditional loans with interest rates, MCAs use a factor rate to determine costs. This can make them more expensive.

Repayment Structure:

Repayment involves taking a percentage of future credit card sales until the total amount is repaid, which may take 3 to 12 months.

Example:

If a business gets a $20,000 cash advance with a factor rate of 1.4 and $500 in fees, the total repayment would be $28,500.

APR Calculation:

The equivalent annual interest rate (APR) for an MCA can be very high, sometimes reaching 226%, emphasizing the high cost of this type of financing.

Pros and Cons:

Pros: No consideration of personal credit score, easy online application, fast decisions, and often no need for collateral.

Cons: High costs, especially when expressed as APR.

In conclusion, while an MCA can provide quick funding, it should be used cautiously, especially due to its high costs. It’s important to consider other options before resorting to an MCA.