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This category covers two types of business financing-merchant cash advances and short-term loans. Although legally they are different products, in practice the two act very similar; most MCA companies offer both products to their customers.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a type of business funding. This type of funding is not a loan, but a sale of future receivables. In other words, the MCA company (the buyer) is purchasing the future revenue of a business (the seller) at a discount.
Fees for borrowing are calculated using a flat fee multiplier, sometimes also called a “buy rate” or “factor rate.” The total repayment amount is calculated by multiplying the borrowed amount by the fee. For example, a merchant with a borrowing amount of $10,000 and a flat fee of 1.3 will have to repay $13,000 (10,000 x 1.3 = 13,000). This fee may also be written as a percentage (ex: your fee is 30% of the borrowing amount), but should not be confused with an interest rate.
Flat fees for MCAs generally range between 1.1 and 1.6 depending upon the MCA company, the strength of your business, and other factors.
Repayment is made by collecting a certain percentage of each sale; this percentage is called the withholding rate. For example, the MCA company might collect 15% of every sale, meaning for every dollar processed, the MCA company will get $0.15 and you will get $0.85. There are three different ways an MCA company can collect their cut:
- Split withholding: The MCA company will partner with your credit card processor. When your processor receives a payment, they will automatically route the MCA company’s percentage to the company, and your percentage to your business bank account.
- Lockbox withholding: The MCA company will set up a bank account in your name, but which they have access to. Your business revenue will go into this account, and the MCA company will deduct their cut at the end of each day before sending the remainder to your regular business bank account.
- ACH withholding: The MCA company will deduct their percentage from your business bank account each day via automated clearing house (ACH), a type of electronic network used to payday loans in Kansas transmit money between bank accounts.
Because your repayment fluctuates according to cash flow, merchant cash advances do not have a set maturity date. However, most MCAs are designed to be repaid in less than two years if your cash flow remains consistent.
What is a Short-Term Loan?
A short-term loan (STL) is very similar to a merchant cash advance. Unlike the latter, a short-term loan is (as one may guess) technically a true loan. In exchange for taking on debt owed to the company, you get access to immediate funds for your business.
Fees for borrowing are calculated as they would be for a cash advance. You are assigned a flat fee multiplier which determines your total payment amount. If you have a fee multiplier of 1.15, and you are borrowing $150,000, you will have to repay a total of $172,500 (150,000 x 1.15 = 172,500). Flat fees for these products normally range between 1.1 and 1.6 (or, in other words, 10% – 60% of the total borrowing amount).
