August 25th 2023.
What is an MCA Loan?
An MCA loan, also known as a merchant cash advance, is a type of alternative business funding product. It is provided by merchant cash advance companies or merchant cash advance funders. An MCA is not a loan in the traditional sense, as it is a business-to-business transaction. The funder provides cash in exchange for a percentage of the business’s future receivables, which is typically taken from future credit card sales.
MCA loans are more accessible than traditional loans, as they are more lenient about credit scores and time in business. However, they are also one of the most expensive business funding products on the market.
How does a Merchant Cash Advance work?
The process of obtaining an MCA is quite simple. The business applies to a funder, and the funder provides the business with a lump sum of cash. The business then repays the advance with a percentage of its future credit card sales.
The advance amount is based on the business’s previous credit card receipts, and the factor rate is the financing charge for the advance. Factor rates are expressed as a decimal and depend on the business’s perceived credit risk. The total owed is calculated by multiplying the advance amount by the factor rate.
Most MCAs have short-term funding with terms ranging from 2-24 months. Additionally, some MCA companies may charge additional fees such as an application fee, underwriting fee, origination fee, administrative fee, or bank fee.
The repayment for an MCA is usually taken on a daily basis, and the holdback rate is the percentage of the business’s sales that will be used for repayment. The holdback rate is based on the repayment total and terms, and it is usually processed through either split withholding, ACH withdrawal, or bank withholding.
To understand the components of an MCA, let’s look at an example. The ABC Company received an MCA with the following features: Advance amount: $150,000, factor rate: 1.25, fees: 2% origination fee, holdback rate: 15%, terms: 24 months, repayment: daily ACH transfer. This means that ABC Company must repay a total of $190,500, with daily sales of $1,740 going towards the repayment.
What is an MCA Loan?
An MCA loan, also known as a merchant cash advance, is a type of business funding product. This type of financing is provided by merchant cash advance companies, or merchant cash advance funders. Contrary to its name, an MCA loan is not a loan, but rather a business-to-business transaction. The MCA company will provide an advance in exchange for a percentage of the business’s future receivables. Repayment for an MCA loan is typically from future credit card sales, but modern MCA options may also include repayment from all revenue via an automated clearing house (ACH) transfer.
An MCA loan is accessible to young companies and those with credit challenges, as MCA companies are more lenient with credit scores and time in business. However, MCAs are among the most expensive financing options on the market.
How does a Merchant Cash Advance work?
The process for obtaining an MCA loan is relatively straightforward. To start, businesses must apply to an MCA funder. Upon approval, they will receive the cash advance as a lump sum. In exchange, the business must repay the advance with a percentage of their future credit card sales. The advance amount is usually based on the business’s previous credit card receipts, and is determined by the MCA funder based on the business’s credit risk.
The advance amount is multiplied by a factor rate to calculate the total owed. Factor rates typically range from 1.05 to 1.9. This fee is charged at the beginning of the MCA and becomes the new balance owed, making it impossible to save money by paying off early.
Terms for an MCA loan are typically short-term, ranging from two to 24 months. The total amount must be paid by the end of the term. If the business does not have the funds to pay off the loan in time, they may have to take out a second MCA or pay additional fees. In the worst-case scenario, if the business defaults on the MCA, the funder may file a lawsuit against the business to get a judgment for the amount owed.
Fees
In addition to the factor rate, some MCA companies may charge additional fees, including an application fee, an underwriting fee, an origination fee, an administrative fee, a bank fee, or a broker fee. Payment frequency for an MCA loan is typically daily or weekly, and the amount paid fluctuates with the sales volume. The holdback rate, or the percentage of sales that go towards repayment, is usually between 5-20%. Most holdback rates are processed through split withholding, ACH withdrawals, or lockbox or bank withholding.
MCA Example
To understand how all the components of an MCA loan work together, let’s look at an example. ABC Company received an MCA with the following features: Advance amount: $150,000; Factor rate: 1.25; Fees: 2% origination fee; Holdback rate: 15%; Terms: 24 months; Repayment: Daily ACH transfer.
In this scenario, ABC Company would have to average approximately $1,740 in daily sales. This means that, for 24 months (730 days), the company would have to pay $261 in daily remittance, for a total repayment of $190,530.
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