Merchant Cash Advances: How High Are The Percentages

Merchant cash advances or MCA’s are an alternative to standard small business loans or lines of credit.  They are a relatively new way of doing business and offer a completely different take on how investments have been done in the past.  They prove helpful to businesses that wouldn’t necessarily be privy to standard bank loans and therefore may have a more desperate need for immediate equity.  Because there is a higher than normal level of anxiety in a situation such as this, these “agreements” do tend to be somewhat more expensive in the long run.  They can work to your advantage if you play your cards right, but they can also become overwhelming and take much needed equity from your monthly bottom line.

Because technically, these are not loans and instead a “sale” of future purchases, they are unregulated for the most part and are not subject to certain banking laws.  Also, determining the actual interest rate you will pay is not something you can specifically determine upon commitment.  Here’s why:  Technically, there isn’t one.  Allow me to explain.

Merchant Cash Lenders do not offer a standard, ‘I will lend you (insert amount), every month you will pay back (insert amount) and in (insert time frame) you will have paid me back (insert amount)’.  MCA’s have a completely different dynamic and a very unique structure.  What these lenders do is hand over a specific sum of cash to you, the business owner.  Once you sign on the dotted line and have deposited that cash, the lender will begin taking a portion of every debit and credit card sale you make until the agreed upon amount is collected in full.  This amount can be as high as 25%, but typically ranges between 10 and 20% per sale and is usually fixed and locked in until the advance is paid off in its entirety. MCA repayment structures use what they call “buy rates' ' or'factor rates”.  These rates generally vary between 1 and 1.4. For example, if you are given an advance of $10,000 and your factor rate is 1.2, you will actually end up repaying $12,000, but depending on how long it takes you to reach the agreed upon goal your APR or annual percentage rate, can be incredibly high.  In this specific example, the effective APR can be as high as 40% if the cash advance is paid off in 6 months.   The sooner it is repaid, the higher the APR.  An APR from a conventional lender must max out at 6% per government regulations, but because the MCA’s are not scrutinized in this same way, they have the option of potentially charging a considerably higher amount.  However, if the borrower pays back the cash advance in small increments over an extended period of time, they end up saving themselves from having to budget a continually high monthly loan repayment for years on end and their APR does end up being lower than the earlier example.  In addition, the vast majority of MCA lenders do not charge late penalties or monthly fees, so that can prove helpful to many business owners just starting out.  The individual debit and credit card payments are called “holdback rates” and they are taken automatically, similarly to the credit card processing fees, although as stated above, the MCA repayment automatic withdrawals are substantially higher than the typical cc processing fee.  The repayment term length is not set, so how soon you get out from underneath this cash advance, depends entirely on how high or low your credit and debit card sales are.  If you have a steady, consistent, high volume business this might work out well for you in a pinch, but if your business isn’t on solid footing, this particular ‘resource’ will only destabilize your already wobbly foundation.

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Created on Feb 18th 2020 02:32. Viewed 548 times.

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