A Business Owner's Guide to Merchant Cash Advance

Introduction

Availability of working capital is essential for the sustenance and growth of any business. However, those who operate at a smaller scale or are relatively new in the market, trying to expand the customer base, find it difficult to make huge profits and often need funding to keep the business afloat. One can opt for a business loan but the lenders usually check applicant’s credit score or demand collateral. So, what should the business owners, who lack both but urgently need funds, do? Well, there is always a way out. If you have a positive cash flow, then you can consider taking a Merchant Cash Advance. Let us learn more about this form of funding.     

A Look at Merchant Cash Advance (MCA)

This is a relatively new method of funding for business owners. An MCA is not exactly a loan; it is an advance payment against your business’s future income. It is an upfront capital given in return for a percentage of the business's daily credit and debit card sales volume. For example, you sell INR 50,000 of a portion of your future credit card sales in lieu of an immediate INR 40,000 lump sum payment from a lender. Now, the lender will collect the portion from every credit card/ debit card sale until the entire INR 50,000 is collected.

How does it work?

Firstly, the MCA provider checks the daily credit and debit card receipts to verify if the business has positive cash flow and is in a position to pay back the funds on time. If the applicant is eligible, then the MCA provider and the former formulate an agreement specifying the advance amount, payback amount, and other terms of the advance. After that, the sum is disbursed to the business’ bank account in exchange for a future percentage of credit card receipts that is deducted on daily basis. The more credit card transactions a business can do, more is the probability of repaying the advance sooner. And, on a slow sales day, the draw from the merchant account would be less as the payback is relative to the incoming cash flow.

Terms in MCA

• ACH:  

As we know MCA is mostly needed by small business setups that mostly get their payment via credit or debit card as a percentage of sale volume goes in repayment. This percentage is paid from the owners’ business bank account through ACH (Automated Clearing House) withdrawals. It is a centralised clearing service that provides interbank money transactions that are repetitive in nature.

• Factor Rate:

An MCA does not have a fixed monthly payment as it is based on a factor rate and not interest rate. Generally, factor rates range from 1.1 to 1.5. For example, if you borrowed one lakh rupees with a factor rate of 1.3, your total payback amount would be INR 1,30,000.

• Retrieval Rate:

It is the percentage of daily receipts that is used to repay the advance. Average retrieval rates are between 5% and 15% but can be higher. Just to clarify, the retrieval rate is what you pay daily while the factor rate is set on the entire advance.