When operating a business, there may be certain times when fluctuations in cash flow become particularly challenging. You might find yourself considering a Merchant Cash Advance (MCA), among other financing options, to help. Before you apply for an MCA, though, it’s wise to make sure you understand exactly how MCAs work and the impact they can have on the financial health of your business.
What is an MCA?
An MCA is a cash advance to your business based on projected future sales, which are typically predicted by looking at your recurring credit and debit card transactions. With an MCA, you receive a lump-sum that instantly becomes part of your cash flow. At the same time you receive the advance, you agree to allow the MCA lender to withdraw payments directly from your bank account so that you can immediately begin paying it back.
Why Choose an MCA?
MCA’s are mostly unregulated by the government. This means that your company is likely to receive an MCA quickly after applying and without jumping through very many hoops. Since it can serve as immediate short-term capital, some businesses find this type of financing helpful at crucial points when extra funding is needed quickly.
How is an MCA Different from a Traditional Loan?
An MCA is tied to your future sales transactions versus more traditional collateral, and the payback is also tied directly to your credit and debit transactions. Being primarily unregulated also means the payback structure and rates can have a wide range, on average anywhere from 14 to 50 cents on the dollar. The term of the advance may also vary more than with a traditional loan. Regardless of what is considered average, the math remains directly tied to your sales, so it’s especially important that you understand the payback structure before accepting the MCA.
What are the Drawbacks?
Unregulated markets cut both ways. In exchange for speed and flexibility, you trade risk. While tying borrowed money directly to future transactions may seem like a legitimate form of collateral, no one can predict the future. Also, because of that risk, the rates you pay for your MCA can become quite high (again, unregulated). And if you end up taking longer than planned to pay back the money (because future sales aren’t as predicted), you could end up paying much more than anticipated. This could eat into such a high portion of your sales that your business profit suffers, or you could go further into debt. Furthermore, many MCA lenders require direct access to your bank account, so they can take out automatic payments daily. This can be easy for the logistics of paying it off but could result in even more cash flow problems.
What is a ‘Confession of Judgment’?
It has become common for MCA lenders to include a Confession of Judgment as part of their agreement. Be very wary of these – a Confession of Judgment effectively grants the provider of the MCA a quick path to a judgement without having to pursue litigation. Which basically means they can avoid normal court proceedings in the case of a dispute or law suit. It’s often a good idea to consult with legal counsel before accepting an MCA that includes a COJ.
It’s important to know the facts before accepting an MCA, but if you already have one? Monitor your bank account closely and be sure there is always money for the withdrawal. Once you default, even unintentionally, some MCA lenders will get aggressive. Some lenders accept settlements, but you may find yourself needing help with negotiations.
Still have questions? Reach out to RTS Financial today.