Merchant Cash Advance Myths Busted

If you are a small business in need of some urgent cash, Merchant Cash Advance should be the first thing that comes to your mind. They are available easily and quickly. In fact many lenders even contact potential borrowers directly through merchant cash advance leads. However, there are certain myths about MCAs that stop many small businesses from leveraging this valuable financial resource. Here are 7 such myths, along with a few facts that help in debunking them:

Myth #1:  Merchant cash advance is just like any other loan

It is not. Apart from the filling up of application form and obtaining the funds from the lender on approval, there is no other similarity between a merchant cash advance and a loan.

Unlike any other traditional loan, merchant cash advance does not involve fixed monthly payments. There is no fixed repayment schedule either. Merchant cash advance, as the name suggests, is an advance that is given against a portion of the future credit/debit card sales volume of the business.

It is given only to small businesses that have a decent volume of credit/debit card sales transactions on a daily basis. Repayment is made through daily remittances from the credit card merchant processing account or the company’s bank accounts. There are three methods of making repayments in the case of an MCA:

  • Split withholding: This is where the credit card sales are split between the merchant cash advance company and the small business that is borrowing the advance. Usually about 80 to 90% of the credit/debit card sales are retained by the borrowing company, while the merchant cash advance lender takes the remaining 10 or 20% of every credit/debit card sales transactions until the advance is fully paid off.
  • Lock box withholding:Here the bank deposits and credit/debit card sales proceeds of the borrowing company are placed into a separate bank account, which is totally controlled by the lender of the merchant cash advance. The lender takes what is due as a repayment of the advance and then forwards the rest of the proceeds to the borrowing company.
  • ACH withholding:In this method a fixed amount that has been agreed upon is deducted on a daily basis (Monday to Friday (holidays not included)) from the bank account of the borrowing company until the cash advance amount is paid back in full. An agreed upon fixed amount is deducted from the borrowing business’s bank accounts daily (Monday through Friday – not including holidays) until the cash advance is paid back.

Myth #2: Merchant cash advances come with very high interest rates.

First of all, there is no interest rate in case of Merchant cash advance as it is not exactly a loan. Instead there is something called the factor rate or buy rate that is used to calculate the fees that has to be paid to the lender. This usually ranges between 1.15 and 1.55 and is calculated on the total payback.

For instance, if you have borrowed a sum of $50,000 as a lump sum amount in the form of a Merchant Cash Advance at 1.25 factor rate, the totally amount you will have to pay back would be $62,500 (50,000 X 1.25). Now, you might think that 1.25 factor rate would mean a 25% interest rate. However, it is not so. 25% is only the interest cost of the advance. Traditional loans take into account the APR or the annual percentage rate that includes the closing costs, the origination fee and the documentation fees. Furthermore, it keeps getting accrued on the outstanding amount of the principal. However, in case of a merchant cash advance, a fixed amount is calculated on the basis of the factor rate, at the time of the origination of the advance and does not vary until the amount has been paid back in full.

Myth #3:  You can borrow loan from only one merchant cash advance provider

That’s not true. You can borrow multiple loans from different merchant cash advance providers. However, stacking up your loans this way is not really a wise option. A better way would be to go for a bigger merchant cash advance, pay back your existing provider and then access the additional funds for your business use. You can also use Merchant cash advance as your line of credit. You can borrow as and when you want as long as you are within the limit and you pay interest only for what you have borrowed.

Myth #4: You will have to purchase new payment equipment

Most POS terminals can be made to work seamlessly with a new provider. It only requires a little bit of re-programming, which might involve a ten-minute phone call with your IT service provider. By following the step-by-step instructions given on the phone, you will easily be able to complete the process of reprogramming within just a few minutes.

Myth #5:  Merchant cash advance can only be used for certain specific needs.

You can use merchant cash advances for any number of purposes you could think of – to buy new equipment/inventory, to make payments to your vendors or suppliers, to pay salaries to your employees, to pay your taxes, to advertise your business, to improve your business facilities or to increase your working capital.

Myth #6:  Merchant Cash Advance requires years of sales history

The eligibility requirements for merchant cash borrowers are as follows:

  • You need to have a minimum credit score of 500
  • You should have been in business for at least a year
  • Your monthly sales volume should be at least $10,000 and a decent portion of that should come from credit/debit cards

Myth #7:  Bank loans are any day better than merchant cash advances

This may be true if you are willing to wait for months to obtain your money. It might take weeks for any bank to review the loan applications and approve them. However, in case of merchant cash advance you can easily get the money electronically deposited into your account within a few days. Qualifying for traditional loans can be quite difficult owing to the stringent eligibility requirements such as years of sales or operating history and established credit history.

Considering the above facts, it may not be such a good idea to turn down the merchant cash advance lender who comes to you via merchant cash advance leads.

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