In today’s world business owners are seeking innovative ways to secure capital. One service that is gaining popularity is Merchant Cash Advance (MCA).
In this blog we will explore what Merchant Cash Advances are, and how exactly they work as a unique form of financing for business owners in need of capital loans.
By the end of this blog, you will know the ins and outs of MCA, and hopefully be able to decide if a merchant cash advance would suit you or someone you know.
What is Merchant Cash advance?
Merchant Cash Advance is a form of business financing in which a business receives a lump sum of capital upfront in exchange for a percentage of its daily credit card sales. This form of financing is more common in industries where credit card transactions are a significant part of the business.
How does a Merchant Cash Advance work?
The business applies for a merchant cash advance, providing information about its credit card sales and other relevant financial details.
Approval and Funding:
If approved, the MCA provider determines the amount of the advance and the factor rate (the multiplier used to calculate the total repayment amount). The funds are then transferred to the business’s account.
Instead of fixed monthly payments, repayment is based on a percentage of the business’s daily credit card sales. This is known as the “holdback” or “retrieval rate.” The MCA provider automatically deducts this percentage from the business’s daily credit card batches until the advance, plus fees, is fully repaid.
In addition to the principal amount, the business is charged a fee, which is essentially the cost of the advance. This fee is determined by the factor rate and is usually expressed as a decimal or percentage of the advance amount.
As the business makes credit card sales, a portion of those sales is used to repay the MCA. The actual daily repayment amount is calculated based on the agreed-upon retrieval rate.
The repayment period is typically shorter than traditional loans, often ranging from a few months to a year. The term is based on the time it takes for the MCA provider to collect the agreed-upon total repayment amount.