What is a Merchant Cash Advance?
A Merchant Cash Advance or MCA is the purchase of future receivables at a discount. It is not a loan, and although there are apparent similarities to the end consumer, there are very clear differences. A loan is determined by a time frame, where a merchant cash advance, in strict sense, has no determined repayment time frame but a repayment amount agreement. This obeys to a set percentage of the amount of daily sales.
The concept originated from using the credit card deposits to repay the agreed amount, hence de name “merchant” and the repayments were made based on a stipulated percentage of the sales deposited. Nowadays the concept has evolved into a repayment of deposits into a business account and not strictly from credit card sales, and although credit card merchant cash advances are still used, they're not the most common.
A few factors have made possible the growth of the industry, one being the tightening of capital reserve ratios in the banking industry and the growing need for small business financing as well as legal resources like the confession of judgement, or COJ, which although a centuries old recourse, it has been instrumental in making sure that the direct funders get paid.
The practicality of the MCA as a non-bank alternative financing instrument has been key in the recent growth of the economy. Being a financing vehicle that can be accessed with relative ease in a very quick manner, the merchant cash advance has become ideal for small businesses to access when their banks deny them loans.
There are many other legal differences between a loan and a merchant cash advance, but a main one is that a loan has a set annual percentage rate or APR and a merchant cash advance has a factor rate, which is basically the discount rate at which the repurchase agreement is set. This is derived from the factoring instruments used to purchase business invoices at a discount.
If you would like to learn more about merchant cash advances or other small business financing vehicles call us at (855) 262–2996 or visit LendrzHub where you can partner with us as a a strategic ISO and benefit from the growing industry's momentum.