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Merchant Cash Advances Explained: An Inside Look

Have you found yourself in a cash crunch for your business? Seeking funding, but put off by lengthy bank processes – and stringent requirements? A merchant cash advance could provide a fast, flexible lifeline. But, how exactly does this alternative financing option work?

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is NOT a loan. It’s a purchase of a portion of your business’ future revenue or receivables. In essence, the funder buys X% of your credit card sales or revenues for X months at a pre-determined price.

For example, you receive $50,000 upfront, while the funder gets 15% of your Visa, Mastercard, etc. sales until they recoup $65,000 – the purchased amount plus their profit.

How Does the Repayment Process Work?

With MCAs, there’s no fixed repayment schedule like with loans. Instead, your debt is “confession of judgment,” meaning you automatically cede a percentage of each card transaction to the funder.

So, if your deal entails paying 15% of sales, that’s automatically deducted daily from your merchant account until the advance and funder’s cut is recovered. The more you sell, the faster you repay.

What If Sales Slump Temporarily?

What happens if sales decline and payments slow? Well, that percentage you’re paying doesn’t reduce – you just take longer to pay it all back. This unpredictable repayment structure is arguably MCAs’ biggest drawback.

But, say you land a major client doubling revenues mid-advance. The opposite occurs – you pay off more rapidly while still forking over that fixed percentage per sale. Can you see how cash flow is king here?

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Which Businesses Use MCAs?

Merchant cash advances suit certain businesses better than others. They tend to attract:

Retail, restaurant, and service businesses with significant debit/credit card sales
Startups or firms lacking robust revenue histories for bank loans
Businesses needing capital fast for growth or investments

Why? With card transactions automatically deducted, funders view them as less risky. Strong cash flow visibility means payback is faster than with a conventional loan.

Potential Risks to Ponder

But, there are very real risks with MCAs – like personal guarantees and confessions of judgment. Meaning, if you struggle, the funder can pursue your personal assets or garnish future income to collect.

Always read MCA contracts thoroughly. Calculate the effective Annual Percentage Rate (APR) – which can be 40-350% for cash advance companies. And gauge if you can consistently meet elevated payment percentages based on sales projections.

If not, you may have just exchanged short-term gain for unsustainable long-term pain. So, carefully weigh the potential rewards against risks.

Getting an MCA: Steps to Follow

If you decide an MCA is right for you after due diligence, here are some key steps:

1. Determine Your Advance Amount Needs: Only borrow what you truly need to grow sustainably. Resisting temptation is crucial.

2. Compare Funders and Terms: Interest rates, payment structures, and requirements vary. Shop diligently for the best fit.

3. Assess the Full Price Tag: Consider the lump sum you’ll ultimately pay back. MCAs can get expensive at high factors.

4. Review the Contract’s Fine Print: Scrutinize it line-by-line before signing – for hidden fees or unfair terms.

See also  Connecticut Business Debt Settlement Lawyers

5. Understand Renewals/Refinancing: Some funders incentivize renewals which compound interest costs. Avoid that trap.

Whether an MCA suits your business comes down to cash flow – both current earnings and growth projections. Use them prudently as intended for short-term injections and you may find it a viable tool. Just don’t get seduced by easy money while incurring long-term debt.

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
Leo
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
Jason
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
Mary
$350,000 MCA Restructured Over 2 Years

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