KEY TAKEAWAYS<\/h3>\n- A merchant cash advance (MCA) is a type of alternative financing where a lender provides a business with a lump sum upfront in exchange for a percentage of the business\u2019 debit and credit card sales in the future.<\/li>\n
- MCA loans typically have very high interest rates and fees that make this type of financing expensive.<\/li>\n
- Home equity loans, asset-based loans, and bank statement loans can be much more affordable alternatives to merchant cash advances.<\/li>\n<\/ul>\n<\/div>\n
What Is an MCA?<\/b><\/h2>\n
While commonly referred to as MCA loans, a merchant cash advance is a type of alternative financing rather than a business loan. With this type of financing, a financing company provides a business with a sum of money upfront. In exchange, the business gives the financing company a percentage of future debt and credit card sales until the loan amount, fees, and interest are paid back.<\/p>\n
See if you qualify for one of our non-traditional mortgages.<\/h3>Contact Us Today<\/a><\/div><\/span><\/p>\nMCA loans typically don’t require a credit check or other forms of income verification and creditworthiness to qualify. Instead, the lending criteria is based on the credit and debit card receipts generated by the business. You show proof of your receipts with a bank statement<\/a> from your bank account or merchant service account.<\/p>\nHow Does a Merchant Cash Advance Work?<\/b><\/h2>\n
A merchant cash advance works through the review of your past credit and debit card sales to determine your average daily receipts. The lender offers you a loan that’s based on a percentage of your average receipts, informs you of the interest rate, APR, repayment terms, and frequency of payments. If you accept the offer, the lender funds your account and then you pay a percentage of your credit and debit card sales to the lender until the loan has been repaid.<\/p>\n
MCA Rates and Fees<\/span><\/h3>\nThe cost of taking out an MCA loan is determined using something that\u2019s known as a factor rate. The factor rate for MCA loans typically falls between 1.1 and 1.5, depending on your unique lending agreement.<\/p>\n
How to Calculate the Cost of an MCA<\/span><\/h3>\nYou can calculate the amount an MCA loan will cost by multiplying the total loan amount by the factor rate and then adding on any additional fees charged by the lender.<\/span><\/p>\nFor example, say you get approved for a $100,000 merchant cash advance with a factor rate of 1.5 and a $1,000 fee. The amount you have to pay back is $151,000, and the repayment period is anywhere between three to 18 months, depending on the amount you borrow and the terms offered by the lender.<\/p>\n
The amount you repay is based on a percentage of your daily or monthly credit and debit card receipts. That means if you generate $60,000 a month in sales via credit and debit card sales, and your repayment percentage is 20%, you’re going to pay $12,000 a month towards the loan. Given your repayment amount is $151,000, you\u2019ll be repaying the loan for over a year and the total cost of financing will amount to $51,000, assuming you make all of your payments on time. Ultimately, the interest rate on the MCA loan in this example is 33.88%.<\/p>\n
So, as you can see, MCA loans carry a very high interest rate. The reason why the fees and average interest rates are so high on MCA loans comes down to the fact that borrowers are considered high-risk. The lender knows that they are taking a chance with a borrower that might have a <\/span>high <\/span>debt-to-income<\/span> (DTI) ratio<\/span><\/a> and come with an increased risk of default. This is also why the lender withdraws money from your merchant or bank account, as it guarantees repayment.<\/span><\/p>\nPros and Cons of Merchant Cash Advance Loans<\/b><\/h2>\n
Like with any type of financing, you should weigh the benefits and drawbacks of a merchant cash advance loan before taking one out. While this type of financing can seem convenient in some situations, it\u2019s important to remember that it comes with a high cost in the long run.<\/p>\n
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Pros of MCA loans<\/b><\/h3>\n
The biggest benefit provided by a merchant cash advance loan is the fact that the loan settles quickly and your account receives funding in anywhere from 48 to 72 hours. You don’t have to fill out a lengthy application, provide proof of income other than your credit card sales, and you don’t need to undergo a credit check. Some of the pros of MCA loans include:<\/p>\n
\n- Funds are provided in days.<\/li>\n
- No collateral is needed to secure the loan.<\/li>\n
- Credit rating isn’t a factor.<\/li>\n
- No restrictions on the use of the funds.<\/li>\n<\/ul>\n
Cons of MCA loans<\/b><\/h3>\n
There are always risks that come with all types of financing, but MCA loans are typically more expensive than other types of lending. They also come with rapid repayment terms in most cases, have high fees and interest rates, and cut into your income from credit and debit card sales until the loan is paid off. This can lead to cash flow problems for your business until the loan is paid off.<\/p>\n
With that being said, some of the cons of an MCA loan include:<\/p>\n
\n- High interest rates and fees.<\/li>\n
- Not subject to federal lending regulations.<\/li>\n
- Reduces business <\/span>profitability.<\/li>\n
- Payment is taken daily or monthly from your merchant account or bank account.<\/li>\n
- The risk of NSF fees. Banks charge non-sufficient funds fees when the automated MCA payment doesn’t clear.<\/li>\n
- No savings are realized when the loan is paid off early.<\/li>\n
- Payment is not fixed.<\/li>\n<\/ul>\n
Getting an MCA loan introduces uncertainty into your cash flows due to its high cost and method of repayment. Understanding the pros and cons of this type of lending helps you make a <\/span>more strategic financing decision for your business.<\/span><\/p>\nWhat Happens if You Default on a Merchant Cash Advance?<\/b><\/h2>\n
If you miss one or more payments on a merchant cash advance loan, you\u2019re considered to be defaulted on your loan. Defaulting on a merchant cash advance loan can have significant consequences. MCA lenders are not subject to the same federal regulations as traditional lenders. Because of this, the consequences of defaulting can be much greater.\u00a0<\/span><\/p>\nAs a result of defaulting on an MCA loan, you may face:\u00a0<\/span><\/p>\n\n- Negative impacts on credit scores:<\/b> If you default on a merchant cash advance, you should expect a lot of damage to your credit score. This default may remain on your credit report for 6+ years.\u00a0<\/span><\/li>\n
- Aggressive collection: <\/b>MCA lenders often work with external collection agencies to aggressively pursue repayment on merchant cash advances.\u00a0<\/span><\/li>\n
- Levies or seizure of assets:<\/b> An MCA lender can take legal action to obtain payment. This may result in a levy on your business bank account or seizure of your business assets.\u00a0<\/span><\/li>\n
- Wage garnishment:<\/b> Another form of legal action, wage garnishment allows your MCA lender to take money from your business\u2019s bank account until you\u2019ve repaid.\u00a0<\/span><\/li>\n
- Seizure of personal finances or property:<\/b> If your MCA agreement includes a personal guarantee, your lender may be able to seize your personal finances or property as a form of repayment.\u00a0<\/span><\/li>\n
- Bankruptcy prevention: <\/b>Defaulting on an MCA loan may prevent you from being able to file for bankruptcy. If you are able to file for bankruptcy but signed an MCA contract with a personal guarantee, you\u2019ll still be liable for the outstanding payment after bankruptcy.<\/span><\/li>\n<\/ul>\n
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<\/a><\/div><\/div>\nAlternatives to MCA Loans<\/b><\/h2>\n
Although merchant cash advances can allow your business to quickly access capital, they\u2019re a short-term solution with costly consequences. MCA loans are very expensive and can negatively impact your company\u2019s cash flow in the long run. Rather than taking out an MCA loan, consider these alternative financing options.<\/p>\n
Home equity loans<\/b><\/h3>\n
What Is an MCA?<\/b><\/h2>\n
While commonly referred to as MCA loans, a merchant cash advance is a type of alternative financing rather than a business loan. With this type of financing, a financing company provides a business with a sum of money upfront. In exchange, the business gives the financing company a percentage of future debt and credit card sales until the loan amount, fees, and interest are paid back.<\/p>\n
MCA loans typically don’t require a credit check or other forms of income verification and creditworthiness to qualify. Instead, the lending criteria is based on the credit and debit card receipts generated by the business. You show proof of your receipts with a bank statement<\/a> from your bank account or merchant service account.<\/p>\n A merchant cash advance works through the review of your past credit and debit card sales to determine your average daily receipts. The lender offers you a loan that’s based on a percentage of your average receipts, informs you of the interest rate, APR, repayment terms, and frequency of payments. If you accept the offer, the lender funds your account and then you pay a percentage of your credit and debit card sales to the lender until the loan has been repaid.<\/p>\n The cost of taking out an MCA loan is determined using something that\u2019s known as a factor rate. The factor rate for MCA loans typically falls between 1.1 and 1.5, depending on your unique lending agreement.<\/p>\n You can calculate the amount an MCA loan will cost by multiplying the total loan amount by the factor rate and then adding on any additional fees charged by the lender.<\/span><\/p>\n For example, say you get approved for a $100,000 merchant cash advance with a factor rate of 1.5 and a $1,000 fee. The amount you have to pay back is $151,000, and the repayment period is anywhere between three to 18 months, depending on the amount you borrow and the terms offered by the lender.<\/p>\n The amount you repay is based on a percentage of your daily or monthly credit and debit card receipts. That means if you generate $60,000 a month in sales via credit and debit card sales, and your repayment percentage is 20%, you’re going to pay $12,000 a month towards the loan. Given your repayment amount is $151,000, you\u2019ll be repaying the loan for over a year and the total cost of financing will amount to $51,000, assuming you make all of your payments on time. Ultimately, the interest rate on the MCA loan in this example is 33.88%.<\/p>\n So, as you can see, MCA loans carry a very high interest rate. The reason why the fees and average interest rates are so high on MCA loans comes down to the fact that borrowers are considered high-risk. The lender knows that they are taking a chance with a borrower that might have a <\/span>high <\/span>debt-to-income<\/span> (DTI) ratio<\/span><\/a> and come with an increased risk of default. This is also why the lender withdraws money from your merchant or bank account, as it guarantees repayment.<\/span><\/p>\n Like with any type of financing, you should weigh the benefits and drawbacks of a merchant cash advance loan before taking one out. While this type of financing can seem convenient in some situations, it\u2019s important to remember that it comes with a high cost in the long run.<\/p>\n The biggest benefit provided by a merchant cash advance loan is the fact that the loan settles quickly and your account receives funding in anywhere from 48 to 72 hours. You don’t have to fill out a lengthy application, provide proof of income other than your credit card sales, and you don’t need to undergo a credit check. Some of the pros of MCA loans include:<\/p>\n There are always risks that come with all types of financing, but MCA loans are typically more expensive than other types of lending. They also come with rapid repayment terms in most cases, have high fees and interest rates, and cut into your income from credit and debit card sales until the loan is paid off. This can lead to cash flow problems for your business until the loan is paid off.<\/p>\n With that being said, some of the cons of an MCA loan include:<\/p>\n Getting an MCA loan introduces uncertainty into your cash flows due to its high cost and method of repayment. Understanding the pros and cons of this type of lending helps you make a <\/span>more strategic financing decision for your business.<\/span><\/p>\n If you miss one or more payments on a merchant cash advance loan, you\u2019re considered to be defaulted on your loan. Defaulting on a merchant cash advance loan can have significant consequences. MCA lenders are not subject to the same federal regulations as traditional lenders. Because of this, the consequences of defaulting can be much greater.\u00a0<\/span><\/p>\n As a result of defaulting on an MCA loan, you may face:\u00a0<\/span><\/p>\n Take charge of your financial wellness and achieve your homeownership goals Although merchant cash advances can allow your business to quickly access capital, they\u2019re a short-term solution with costly consequences. MCA loans are very expensive and can negatively impact your company\u2019s cash flow in the long run. Rather than taking out an MCA loan, consider these alternative financing options.<\/p>\nSee if you qualify for one of our non-traditional mortgages.<\/h3>Contact Us Today<\/a><\/div><\/span><\/p>\n
How Does a Merchant Cash Advance Work?<\/b><\/h2>\n
MCA Rates and Fees<\/span><\/h3>\n
How to Calculate the Cost of an MCA<\/span><\/h3>\n
Pros and Cons of Merchant Cash Advance Loans<\/b><\/h2>\n
<\/p>\nPros of MCA loans<\/b><\/h3>\n
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Cons of MCA loans<\/b><\/h3>\n
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What Happens if You Default on a Merchant Cash Advance?<\/b><\/h2>\n
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Download the Griffin Gold app today!<\/h3>
\r\nUse invitation code: GRIFGOLD<\/b> to register.<\/p><\/a><\/a><\/div><\/div>\nAlternatives to MCA Loans<\/b><\/h2>\n
Home equity loans<\/b><\/h3>\n