Discover the true cost of merchant cash advances and better ways to manage cash flow.

Offers for merchant cash advances (MCAs) that promise no impact on your credit may seem appealing but once you look closer it becomes clear these products come at a steep price. Here’s an overview of how MCAs work and better alternatives for managing cash flow.

The dynamics of merchant cash advances

While providers of MCAs supply a lump sum up front, an MCA is not a loan. It’s an agreement where the financer buys a business’ future sales. The payback is processed through credit and debit card purchases according to the holdback rate and factor rate specified in the agreement.
Holdback rates are often between 10% and 20% and designate how much of the merchant’s future daily sales are assigned to the MCA provider. For example, a holdback rate of 20% means that 20% of daily credit or debit card sales are automatically sent to the MCA company.

The factor rate is a multiplier used to determine how much the recipient pays back. Usually, it’s a value between 1.1 and 1.5. This means that an advance of $30,000 with a multiplier of 1.2 requires $36,000 to be repaid.

Recipients of MCAs may also be required to pay monthly program fees as well as underwriting and administrative fees. Penalties may kick in if payments are missed. Altogether, the cost of borrowing can be the equivalent of an APR of 35%, rising as high as 100%.

How long it takes to pay back an advance depends on the factor rate, holdback rate and the level of daily sales. If business is booming, payback goes faster than when sales are in a slump.

Merchant cash advances are widely viewed as one of the most expensive ways to get business financing. Also, there’s no federal regulation of MCAs; marketing pitches for them can be misleading and repayment conditions can exacerbate financial strain.

Who uses merchant cash advances?

MCAs catch the interest of business owners with cash flow challenges. Often, this means new business owners seeking start-up capital, contractors who need to cover supplies and labor costs until they get paid, seasonal businesses operators like landscapers and restaurant owners.

For some business owners, MCAs offer access to cash even if they have poor credit or no collateral. However, MCAs will not help build credit and could harm creditworthiness if the owner seeks more traditional business financing.

Avoiding costly MCAs

Business owners may consider an MCA when they see declining income and cash balances. However, with planning they can avoid the high costs of MCAs and other schemes designed for businesses with bad credit.

Step one is financial monitoring so you can make changes before your financial situation becomes a five-alarm fire. Step two is establishing credit lines when times are good and before you need extra cash. For example, if you’re a contractor, you know a major project means buying supplies and fronting labor expenses weeks, if not months, before you get paid. Line up credit before you actually need to use it.

Position your business to handle cash flow challenges

To better position your business to handle cash flow challenges, talk to a traditional lender like Consumers sooner rather than later. If you have at least a two-year history of solid financial performance and can explain the reason you need cash, we can work with you on a business line of credit or business credit card. Either can be used for cash flow needs.

For businesses with less than a two-year history, a business credit card can greatly ease cash flow. That’s because you have 30 days to pay the statement balance. With strategic timing, you can even extend your float period up to 54 days to make purchases without paying interest.

Get your business loan questions answered

Our commercial loan officers are here to answer all your financing questions. Contact us online or call us at 800.991.2221.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.