Five Things You Must Know About Merchant Cash Advances

0
Five Things You Must Know About Merchant Cash Advances
NikolayFrolochkin / Pixabay

Solomon Berkoff, Principal at Charleston Capital Management, explains five things you must know about Merchant Cash Advances (MCA).

Play Quizzes 4

1. Generally, how does a Merchant Cash Advance work?

In a Merchant Cash Advance, a small business agrees to sell future revenue in exchange for an upfront payment.

[Exclusive] ExodusPoint Is In The Green YTD Led By Rates And EM/ Macro Strategies

Invest ESG Leon CoopermanThe ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More

[REITs]

Q1 hedge fund letters, conference, scoops etc

2. What types of businesses is an MCA suited for? And what kind of credit/financial profile, time in business, etc. is needed to qualify?

An MCA is suited to any business that generates predictable sales. The more consistent a businesses’ cashflows, the more favorable the terms of their MCA will be.  Good credit and a longer time in business are helpful, but not necessary, to get an MCA.

3. What are the chief benefits associated with MCAs?

Because of the decline of small banks, who in the past were the main lenders to small businesses, MCAs have become an important funding tool.  The typical MCA ranges from $10,000 to $250,000 and the terms include the sale of daily receivables up until a pre-defined amount is paid back.

MCA’s main advantage is speed – they can be funded much more quickly than a traditional bank loan.   Often, small businesses need money fast.  Small business owners generally do not have the time to go through a lengthy application process because they are too busy running their small businesses.

Merchant Cash Advances are extremely flexible – they do not require collateral or extensive due diligence. They are underwritten based upon bank statements which today can be easily downloaded through connecting directly with the merchant’s online banking portal.  Also, because they are based off of future cashflows, they are generally only repaid as the business actually makes sales.  This makes them a great choice for small business with seasonal revenues.

4. What are the biggest downsides?

MCAs usually have high effective APRs. While MCAs do not have an actual interest rate, the discount rate can be compared to the funding to determine what the small business will pay for the capital. The lack of standardized, reliable data is a real hinderance to small businesses obtaining affordable funding.  Our mission at Charleston Capital is to bring data clarity to small business finance through our Secure Funding Ecosystem™.

5. What alternatives to MCAs should small businesses consider if they need financing quickly but aren’t able to qualify for a traditional bank loan?

There are non-bank lenders who provide small business financing in the form of loans as opposed to Merchant Cash Advances. These loans often have the same expedient underwriting and similar criteria although as opposed to an MCA they require fixed payments (often daily or weekly) and their interest rates are often equivalent to the effective APR of an MCA.

Updated on

Solomon Berkoff joined Charleston Capital as a Principal in January 2019. Prior to coming aboard at Charleston Capital, he spent almost twenty years as a structured finance trader and banker. Solomon began his career at Bank One in Chicago, and was part of a team that helped to make them a top ten asset backed origination franchise.
Previous article Iran vs Saudi Arabia, US war: Two oil tankers attacked off UAE coast
Next article Google Search Bar Missing From Discover Feature

No posts to display