A merchant cash advance (MCA) agreement is a financial arrangement between a business owner and a funding provider, typically a specialized finance company or alternative lender. It is a form of short-term financing where the lender provides a lump sum of cash to the business in exchange for a portion of the future credit card sales or revenue of the business.
Under the terms of a merchant cash advance agreement, the funding provider advances a specified amount of money to the business. In return, the business agrees to repay the advance, along with an additional fee or factor rate, by allowing the lender to collect a percentage of its daily credit card sales or a fixed daily or weekly payment from its bank account until the total amount is repaid.
Merchant cash advances differ from traditional loans in several ways. Firstly, they are based on the business’s future revenue rather than its creditworthiness or collateral. This makes MCAs a viable option for businesses with limited credit history or those that may not qualify for traditional financing. Secondly, the repayment is typically made automatically by deducting a percentage of daily sales or a fixed payment, known as a holdback, rather than fixed monthly installments.
It’s important to note that merchant cash advances often come with higher costs compared to traditional loans, mainly due to the factor rate or fees associated with the advance. While MCAs can provide quick access to capital, it’s essential for businesses to carefully review the terms, costs, and potential impact on their cash flow before entering into a merchant cash advance agreement. After litigating hundreds of lawsuits arising out of these MCAs, I can tell you with absolute certainty that they can quickly become a nightmare if your business isn’t in perfect financial standing.