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