A lot of Small Business clients don’t quite understand what a Merchant Cash Advance (“MCA”) is and so this article is designed to provide a bit of clarity on this subject. First, lets cover what a Merchant Cash Advance is not… It is NOT a loan! A Merchant Cash Advance is a purchase of future sales, generally, future Point of Sale (“POS”) transaction. Essentially, firms that engage in these types of transactions seek to determine the average monthly point of sale volume of a business, to predict what could reasonably expected from the business in the future. To properly analyze this, the Merchant Cash Advance firm will ask the small business owner to provide the last six months of the business bank accounts. Based on the data provided in these bank statements, the Merchant Cash Advance firm well determine how much of the businesses future business they wish to purchase.
Once this determination is made, an offer and funding package is presented to the business and once completed they are able to receive money today, for a portion of their future business. These types of transactions are generally not based on the business owner’s credit rating. A few caveats that the business owner need to understand are:
- These transactions are not free… While the Merchant Cash Advance firm is providing money today for future business, they are looking to make a profit on what they provide you today i.e. if you are provided with $50,000.00 today, the Merchant Cash Advance firm may be want to buy $60,000 of your future business in return, the difference being their profit.
- This generally short term financing, meaning that most Merchant Cash Advance companies will not want to extend the term of purchase beyond one year.
- Merchant Cash Advance firm will, more often times than not, want to begin to see the fruits of their investment immediately and regularly, therefore, they will seek to collect a percentage of your daily point of sale transactions for an agreed upon period of time until their what they gave you initially plus their profit is collected; Remember that generally, this period will not exceed one year.
- The Merchant Cash Advance that you receive can only be used for business expenses and cannot be used for any matter of a personal nature and this is something that you must agree to in writing before a Merchant Cash Advance firm will be willing to advance you money against future business.
We hope this provides a bit of clarity on the subject of Merchant Cash Advance. If you have any further questions regarding this matter or would like discuss potentially selling a portion of your future business. Please feel free to contact us at: 212-206-7717 or [email protected].