Merchant Cash Advance - Pros and Cons

Cash Advance Chargebacks

The idea of getting a substantial cash advance can be appealing to most eCommerce entrepreneurs. While technically not a loan, a Merchant Cash Advance allows a business to sell off a percentage of their future debit and credit card revenues at a discounted amount, in exchange for an immediate influx of cash - usually at a smaller amount than they could receive in a Small Business administration loan, or even a direct bank loan.

With the right terms, it can allow them to increase their inventory, their marketing, their personnel or any other expense which could conceivably help them grow their business more quickly than they might by patiently saving money for additional expenses. And it can be done much quicker and simpler than a larger business loan would be. 

New call-to-actionMerchant Cash Advance is a term that originally applied to a lump-sum payment, an advance in exchange for an agreed-upon percentage of a company's future credit card payments. The term Merchant Cash Advance now refers to a wider variety of small business financing options, all of which generally feature either daily repayments - as opposed to large monthly payments, or short-term total repayment - usually less than 24 months - rather than the longer terms usually associated with traditional bank loans. 

Under MCAs where there are monthly payments, the amount is pre-determined, and set at a percentage of sales, which prevents the merchant from ever being unable to afford their payment, regardless of the fluctuation of sales. 

But it's an important distinction that these cash funds are an advance, not a loan. They are the sale of a portion of future credit and debit card sales. For example, the provider may sell $50,000 of its future debit and credit card sales for an immediate advance of $40,000, then surrenders an average of 15-35% of its daily card revenue to the provider until the entire $50,000 is collected. 

The factor rate is the number that tells how much the business has to pay back. A factor rate of 1.0 would mean they only pay back exactly what they were advanced - which is unheard of. The normal range is between 1.12, and 1.5.  A factor rate of 1.5 would mean you're paying what the advance was, as well as half as much again (Advanced amount x 1.5)

The retrieval rate is the rate at which you're paying back, the percentage of your daily or monthly credit card sales you pay toward the total due. The average retrieval rates are between 5 and 15%, but could be higher or lower. 

As a result of all of these variables, there are some circumstances and caveats that make the MCA a perfect situation for some new or existing businesses, while not being a great plan for others. Get out your yellow legal pad, draw a line down the middle, and let's look at the pros and cons of getting a Merchant Cash Advance. 

Getting the Money 

PRO: If you have solid, predictable sales, but haven't yet established a solid credit rating, a Merchant Cash Advance (MCA) is a way for you to get additional capital quickly, without having to save or establish more trustworthy credit. Even merchants with poor credit rating have an excellent chance of receiving an MCA, because the MCA lenders are looking at what's coming in next, not issues you've had in the past. 

CON: Because you're not receiving a more traditional type of loan, from a government sanctioned and regulated financial institution, there are few to any usury guidelines, meaning you could wind up selling off your future earnings at a substantial discount - as much as 20% or more, in exchange for immediate cash. 

How Much Do You Need? 

PRO: Banks take as much time and effort servicing a $200,000 Small Business Administration loan as they do a $2 million loan, and so they'd rather write larger loans. But many small businesses need a smaller amount of cash to improve their business, and would prefer not to be saddled with a larger loan than they really need. And so for eCommerce businesses looking for a relatively small amount of cash right now, an MCA may be easier and more desirable to obtain. 

CON: Banks are regulated and must follow guidelines on setting interest rates on SBAs, which averaged nearly $375,000 per loan in 2015. For businesses looking for smaller cash infusions, they may be forced to pursue a MCA, which will likely leave them with the cash they need now in hand, but cost them a higher percentage rate to receive that advance. In addition, the lack of legislation regarding MCA lenders leaves a mixed bag of scruples among MCA lenders, and you may be persuaded to a higher amount than you really need. 

Paying For the Money

PRO: There's little to no paperwork involved on most MCAs, as most of the applications are done online, have a quick turnaround, and an almost immediate delivery of funding after approval. In addition, there's a high approval rate on this type of advance.

On top of that, the repayment amount is based in part on the discount percentage you've agreed to, but also on a percentage of sales. If you're paying 10% of daily or monthly sales, instead of a fixed amount, a bad day or month will never put you behind in your ability to make a payment.

CON: Because you may have sold the future credit card sales at a rate as high as 20%, you could feel the pain of little return from increased profit. In other words, if your business is suddenly making an extra $10,000 a day, you could be paying back as much as $2,000 a day until the total amount of your advance is paid back. You may begin to wish you had applied for a more traditional loan with a fixed monthly payment, at a lower interest rate.  In addition, an unregulated lender may be charging more plentiful and costly fees associated with processing the repayment. 

No Late Fees

PRO: With a MCA, there are no late fees - the payments are made automatically to the lender directly from an agreed-upon percentage of the business's daily or monthly card processing. With a pre-determined pay-back amount, and no late fees, the amount you owe is pre-set, and can never increase. 

CON: The reason there's never a late fee is because you never even have the option or flexibility of being late on a payment - the agreed-upon percentage of your sales for repayment never even hits your account - the money goes directly from your credit card processor to the MCA lender. 

Negotiate Your Rate

PRO: As the merchant receiving the cash advance, you have the right to negotiate not just your factor rate (the amount you'll be paying back for the advance - there can be a big difference between 1.15% and 1.5%), but also the retrieval rate. Based on your credit and negotiating skills, you could save $15,000 or more on a $50,000 cash advance, as well as save as much as 10% or more of your daily or monthly cash flow that would go towards repayment. 

CON: If you go with a SBA instead of a MCA, regulations limit the amount of percentage banks and other lenders can charge on a loan, even being forced to take the highest rate allowable on a SBA is likely to give you a savings on percentage points as compared to the discount rate you could receive from an MCA lender. 


PRO: In most cases, if you get a MCA, you have no limitations on what you do with the money. You could buy new software, more merchandise, invest in a marketing campaign or simply buy more office furniture and supplies. It's your advance, and what you do with it is up to you. 

Manage Chargeback In-House Or OutshoreCON: But an MCA lender can put some limitations on how you run your business, to ensure that you remain capable of paying back your advance. Those restrictions can include refusing to allow you to switch credit card processors until after the advance has been paid back, or not allowing you to incentivize customers from paying with methods other than credit or debit cards. For example, you could be forbidden from offering a cash discount. You could even be discouraged or prohibited from changing operational hours, closing for vacation, changing locations or even deciding to pursue a SBA until the MCA is paid back. 

Tally Up the Pros and Cons

With so much to consider, a merchant needs to look at all the pros and cons, evaluate what they need and what they're willing to spend to get it, and then decide which method of getting an influx of clash works best for them. Tally up both columns, and choose the one that works best for you and your current situation. 

A Merchant Cash Advance can seem like too much to give away for a relatively small amount of money as a loan. But it may be all you need, and the right way for you.

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