A merchant cash advance implied a creatively structured lump-sum payment to a business in trade for an agreed-upon portion of future credit card and debit card sales. The phrase is now commonly used to represent a variety of small business financing alternatives identified by short-term payments (commonly under two years) and small fixed payments (typically paid each business day) as opposed to the substantial monthly payments and longer payment cycles compared with conventional bank loans. The term “merchant cash advance” abbreviated MCA may be used to represent purchases of future credit card sales receivables or short-term business advances.
MCA companies grant funding to businesses in trade for a percentage of the businesses’ daily income, directly from the processor that receives and settles the credit card payments or by ACH payment. A businesses payments are drawn from customers’ debit and credit-card purchases or directly from the business checking account via an ACH payment on a daily basis until the commitment has been satisfied. Most MCA companies form alliances with credit card payment processors and then take a fixed or variable portion of a merchant’s future credit card and/or gross sales.
These merchant cash advances are not loans—rather, they are a sale of a portion of the future sales. This arrangement has some benefits over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the customer greater versatility to control their cash flow, especially during a slow period. Advances are processed faster than a conventional loan, giving borrowers immediate access to capital. Also, because advance companies typically assign more weight to the underlying performance of a company than the owner’s scores, MCA’s offer an option to businesses that do not qualify for a traditional loan.
Usage and Payment Methods
There are three different repayment methods:
ACH: When structured as a purchase of future receivables, the finance company receives payment information and deducts its share straight from the business’s checking account via ACH.
Split: When the credit card processor automatically splits the credit card sales among the business and the MCA company per the agreed division (commonly 12% to 25%). This is the most popular and preferred method of settling funds for both the customers and MCA businesses.
Lockbox: The company’s credit card sales are transferred into a bank account managed by the MCA company and then the agreed upon division is forwarded to the company business account via ACH, EFT or wire. A lockbox is the least preferred process since it results in a one-day suspension in the business collecting the incomes of their credit card sales.
As of 2016, the industry was estimated to be funding at least $5 billion a year to small businesses.