Merchant Cash Advance, also known as MCA, provides alternative lending to companies suffering from credit problems and unable to go to a local bank. In contrast to traditional small business loans, MCA providers give prepaid funds in exchange for a portion of the company's future sales. They are not limited by laws about maximum interest rates and lenders.
How can I use MCA?
Initially, MCA was only used by companies that made money from selling credit cards. B. Retail stores and restaurants. Currently, MCA can be used for all types of transactions, with advances ranging from $5,000 to $2 million. This is by far the fastest growing industry in the last decade.
What is a factor rate and How is it calculated?
MCA lenders typically borrow the total amount in advance and repay it by withdrawing funds daily or weekly through ACH. There is a charge associated with this prepayment known as the factor rate. This depends on the merchant's ability to repay the loan. Factor rates ranging from 1.25 to 1.50 are preset by the lender and typically depend on total monthly sales and risk assessment. The higher the risk class, the higher the factor rate.
Example: If a company has a total monthly turnover of $100,000, the lender will lend the company $100,000. After performing a risk assessment, the lender determines a factor rate of 1.25. Therefore, the prepayment is $125,000. If you choose to repay daily from Monday to Friday, the seller is responsible for paying $496 per day for 12 months.
MCA loans are ideal for companies with good sales, but they are not eligible for loans due to lack of collateral or poor credit history. Businesses include restaurants, retail stores, drug stores, florists, beauty salons, and tanning salons. The main advantages of this loan are quick approval and access to capital.
Be careful when getting an MCA. Financial experts advise against this type of financing due to its high cost and short duration. This can lead to further debt. If you have low credit and no other funding options, carefully weigh the pros and cons before signing up with an MCA provider.
Cox Business News staff Writer
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