If you’re looking at funding options for your small business, chances are you have heard of merchant cash advance (MCA). MCA is a funding option wherein a provider will give you a sum of money that you will return via your credit card sales. This means that a part of your daily credit card sales will go to your merchant cash advance provider as payment for the money they gave you.
Although this seems like a great option, it makes other businesses hesitate once they realize that they will have to pay for at least 20% more of the cash advance. There are times that this rate goes up to 40%. Any business owner would think twice about this, but before you shut your doors completely, you might want to know what makes MCA that expensive. Here are the factors that give you that rate.
Because MCA is highly dependent on the credit card sales of a company, they are putting a lot of their resources at risk because there is a high chance that their projected sales will fall short. When credit card sales become unpredictable, the provider is facing a chance of them not being paid on time or not being paid at all.
Yes, this is part of the equation because the longer the merchant doesn’t pay, the less money the funder has to rotate among its merchants and for the expenses of the company. In return, your credit card sales can affect the sales of an MCA provider. This is especially hard for the provider when a lot of other businesses they have lent money to have few credit card sales.
There will be cases where an MCA provider will have to write off a debt because a business simply cannot pay back their cash advance through their credit card sales. This is already a very high risk in itself that deserves to have a high percentage when it comes to the added payment you have to settle. Just imagine a whole industry not being able to pay their debts because the industry is experiencing a slump in sales. If some of those businesses took an MCA, then the MCA providers would have just lost money.
Part of the additional 20-40% you’ll be paying is the cost of acquisition. While some MCAs have their own resources to connect to merchants, some also outsource an independent service organization where they will be connected to the merchant. The latter option is cheaper than the former. If the provider has its own way of reaching out to merchants, then the cost will be much higher and the additional payment you will settle is higher.
Even if there’s at least 20% additional fee you have to pay on top of the cash advance, the rate is not entirely meant to be that high. However, MCA providers do have to account for the big risks they are putting themselves in and one way of accounting for them is having a big additional payment from you.