The True Cost of Merchant Cash Advances: Insights and Exit Strategies

At first glance, a Merchant Cash Advance (MCA) could seem like a great idea, especially if your business is short on cash to cover expenses. However, as a small business owner, it is imperative to make sound business decisions. A quick infusion of cash sounds amazing, but at what cost?

Merchant Cash Advances (MCAs) are an alternative form of business financing often provided by merchant service providers or credit/debit card processors. Unlike traditional loans, MCAs work by “purchasing” a set amount of your business’s future credit or debit card sales at a discounted or factored rate. They do not technically charge an interest rate, which is why they are not advertised as traditional loans. Instead, the repayment terms are based on a percentage of daily sales, making them appear to be flexible and adaptable to the business’s volume.

How MCAs Work

• Funding Method: MCAs provide immediate capital by purchasing future sales at a discount. The funds are dropped into the business bank account.
• Repayment Terms: Repayment terms are typically aggressive and may be set as a percentage of daily sales, which can range from 3% to as high as 25% of each transaction or as a fixed payment. Repayments are often daily, though some MCAs offer weekly payments. Most MCAs have short repayment periods, typically 18 months or less.
• No Traditional Interest Rate: MCAs do not have an advertised interest rate, but the cost of capital can be substantial. For example, a $100,000 advance with a factor rate of 1.5 would cost a total of $150,000.

The Impact of MCAs on Your Business

• Quick Access to Capital: MCAs offer an easily accessible cash injection for short-term needs like operating expenses or payroll. But MCAs are not technically a business loan, and your payment history is not reported to credit bureaus so that you won’t build credit through financing with MCAs.
• High Cost of Financing: The cost of MCAs can be extremely high, ranging from 40% to greater than 350% of the borrowed amount, plus high origination and other fees. The most extreme case we’ve seen is 2500%!
• Flexible Yet Stringent Repayment Terms: Repayment terms vary but commonly include:
  • Daily withdrawals from the business’s checking account.
  • A fixed percentage is deducted from each card transaction
  • Or a combination of both.

Financial Strain from MCAs

The combination of high financing costs and stringent repayment terms can place significant financial strain on businesses. AmPac recently assisted a restaurant owner burdened by multiple MCA-style debt, paying a staggering $2,226 daily, equating to $67,998 every month. AmPac Business Capital was able to restructure this debt into a single monthly payment of $2,050 with a traditional loan. The new financing included additional capital to replenish the business reserves after being drained by the daily payment costs of the MCA debt.

How to Properly Exit an MCA

Business owners often turn to MCAs when cash is tight, and while they offer quick access to cash, the long-term cost and impact on your business can be significant. Always consider alternative financing options and consult with financial advisors before committing to an MCA.  If you find yourself needing to engage in an MCA, it is crucial to plan ahead with your exit strategy by identifying an “Exit Lender” or a mission-based lender such as AmPac to restructure the debt with manageable terms.

Let AmPac Be Your First Call

At AmPac, we offer a range of business financing solutions, including debt refinance.
For businesses struggling with the burdens of an MCA, contact us to explore your refinancing options. Our goal is to provide sustainable financial solutions to help your business thrive.

Save the date of September 26^th as AmPac will host a webinar event discussing the cost of MCAs and hear from business owners and their experience with using MCAs, the impact to their business and how they exited the burden of the MCA debt.

To discuss financing options for your business, contact an AmPac Business Capital loan specialist at 909-915-1706.