Merchant Cash Advances: Repayment, Interest Rate Fees, and Charges
Mr. Harish Raghav runs a computer parts manufacturing unit in Hyderabad. He finds that his working capital is not sufficient to take bulk orders or carry out expansion plans. He thought of taking a business loan, but being a newcomer, his credit score is still a work in progress. Moreover, he does not own any valuable asset that can serve as collateral. For business owners like Raghav, a merchant cash advance (MCA) is a strategic alternative when traditional merchant loans or credit lines are unavailable.
What is a Merchant Cash Advance?
A Merchant Cash Advance (MCA) is a financial product designed for businesses that generate a significant portion of their revenue through credit/debit cards or digital transactions. Unlike a traditional loan, an MCA is technically the purchase of future sales. A provider gives you a lump sum upfront, and in exchange, you agree to pay back that amount plus a fee from your daily sales. This is particularly useful for small businesses or newcomers who lack collateral or a "prime" credit score.
How Does a Merchant Cash Advance (MCA) Work?
The MCA process is designed for speed and flexibility, operating through three main phases:
1. Application and Approval
The process begins with a digital application where you share your Point-of-Sale (POS) statements. Lenders analyze your daily transaction volume rather than just your credit score. Under standards, many regulated NBFCs use automated algorithms to provide an approval decision within hours.
2. Funding
Once approved, the funds are deposited into your business bank account, often within 24 to 72 hours. You receive a lump sum (the "Advance"), and the lender applies a Factor Rate to determine the total repayment amount.
3. Repayment
Repayment is not made through fixed monthly EMIs. Instead, it happens automatically via:
- Split Funding: The credit card processor splits the daily sales, sending a percentage to the lender and the rest to you.
- ACH Withdrawal: The lender withdraws a fixed percentage from your bank account daily based on your sales records.
What are the Repayment, Interest Rate Fees, and Charges on MCA?
Understanding the cost of an MCA is vital, as it differs from the "Reducing Balance" interest used in standard loans:
- Factor Rate: This is a multiplier (typically 1.1 to 1.5). For example, a ₹1,00,000 advance with a 1.2 factor rate means you repay ₹1,20,000. This fee is fixed from day one.
- Retrieval Rate (Holdback): This is the percentage of daily sales (usually 5% to 20%) deducted until the total amount is cleared.
- Processing Fees: An upfront administrative fee, usually deducted from the disbursed amount.
- Key Fact Statement (KFS): Per RBI mandates, lenders must provide a Key Fact Statement(KFS) showing the Annual Percentage Rate (APR) allowing you to see the true cost of the advance compared to traditional loans.
Advantages and Disadvantages of Merchant Cash Advance (MCA)
| Feature | Advantages (Pros) | Disadvantages (Cons) |
| Asset Security | No Collateral Required: You do not need to pledge property, inventory, or equipment to secure the funds, protecting your business assets. | Personal Guarantee: While no physical collateral is needed, many contracts still require a personal guarantee from the business owner. |
| Repayment Structure | Flexible Repayment: Since you pay a percentage of sales, your daily deduction drops during slow months, which helps protect your operational cash flow. | Daily Cash Flow Impact: Automated daily deductions can reduce the immediate liquidity available for day-to-day expenses like utility bills or payroll. |
| Speed & Access | High Speed & Ease: Ideal for urgent needs; disbursement usually happens within 24 to 72 hours with minimal documentation compared to bank loans. | No Early Pay Incentive: Since the "Factor Rate" is a fixed fee applied upfront, you generally do not save on interest by paying the advance back early. |
| Eligibility | Credit Score Lenience: Approval is based on your daily sales volume and business consistency rather than just a high personal CIBIL score. | Higher Cost (APR): The effective Annual Percentage Rate (APR) is significantly higher than traditional loans, sometimes reaching triple digits when annualized. |
Who Can be Eligible for a Merchant Cash Advance (MCA)?
An MCA is ideal for businesses with high-frequency transactions. Common eligible profiles include:
- Retailers & Kirana Stores: Businesses with high daily footfall and card/UPI payments.
- Restaurants & Cafes: Establishments with consistent daily revenue.
- E-commerce Sellers: Online vendors with a steady stream of digital sales.
- Service Providers: Diagnostic centers, salons, or workshops using POS terminals.
Eligibility & Documents Required for Merchant Cash Advance (MCA)
Eligibility Criteria
- Business Vintage: Usually at least 6 months to 1 year of active operations.
- Minimum Monthly Sales: Typically a minimum of ₹1 Lakh to ₹2 Lakh in monthly card/UPI transactions.
- Consistent Revenue: Evidence of regular daily sales without significant "no-income" gaps.
Documents Required
- Identity Proof: PAN Card and Aadhaar of the business owner.
- Business Proof: GST Registration, Trade License, or Udyam Certificate.
- Bank Statements: Last 6 months of current account statements.
- POS/Digital Statements: Last 3–6 months of reports from your payment gateway or card machine.
How to Apply for a Merchant Cash Advance (MCA)?
- Check Eligibility: Visit the website of a regulated NBFC like Hero FinCorp and use the business loan/MCA eligibility tool.
- Upload Documents: Submit digital copies of your bank and POS statements.
- Review the Offer: Carefully read the Key Fact Statement (KFS) to understand the factor rate and retrieval rate.
- Verification: The lender will verify your sales consistency through automated digital checks.
- Disbursal: Sign the agreement digitally, and funds are transferred to your account within 1-3 days.
What is the difference between Merchant Cash Advances vs. Business Loans?
| Feature | Merchant Cash Advance (MCA) | Traditional Business Loan |
| Structure | Sale of future receivables | Debt with interest |
| Repayment | Daily % of sales (Flexible) | Fixed Monthly EMIs (Rigid) |
| Cost Basis | Factor Rate (Fixed fee) | Interest Rate (Reducing balance) |
| Collateral | Unsecured | Often requires collateral |
| Speed | Extremely fast (24–72 hours) | Moderate (5–15 days) |
Conclusion
A Merchant Cash Advance is a powerful tool for businesses like Harish Raghav’s that need fast, unsecured capital to seize growth opportunities. While the costs are higher than traditional loans, the flexibility of "paying as you earn" provides a safety net during lean periods. As per financial trends, ensure you borrow from a regulated NBFC to guarantee transparency under the RBI’s Fair Practices Code.
FAQs
Does an MCA Help Improve My Cibil Score?
If the MCA is provided by a regulated NBFC that reports to bureaus, timely "repayments" can positively influence your business credit profile.
Can I Get An MCA If I Don't Use A Card Machine?
Most providers require a POS machine or a digital payment gateway, as they need a verifiable stream of digital sales to automate the retrieval process.
What Is A "Holdback" In MCA?
It is another term for the retrieval rate, the specific percentage of your daily sales that is automatically diverted to the lender.
Are There Any Hidden Charges for MCA?
No, under the RBI guidelines, all charges must be clearly mentioned in the Key Fact Statement (KFS) provided to the borrower before signing.
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