A merchant cash advance (MCA) is a short-term financing option for startups that allows them to receive an advance on future sales in exchange for a percentage of those sales. In this blog post, we'll explore the main terms of an MCA, its use cases, and the pros and cons of this financing option for startups.
Main Terms of a Merchant Cash Advance:
1. Advance Amount: The advance amount is the amount of money that the startup will receive in exchange for a percentage of future sales. This amount is usually determined based on the startup's average daily/weekly credit card sales.
2. Repayment: Repayment is typically made through a daily or weekly debit from the startup's bank account, based on a predetermined percentage of its daily credit card sales.
3. Holdback: The holdback is the percentage of the startup's daily credit card sales that is deducted for repayment of the advance. This percentage is usually between 10% and 20%.
MCA is a great way for runway extension:
1. Working Capital: Startups can use an MCA to access working capital for day-to-day operations, such as purchasing inventory, hiring employees, and marketing efforts.
2. Seasonal Needs: An MCA can also be used to fund seasonal needs, such as increased marketing expenses during the holiday season or increased inventory needs during peak sales periods.
3. Emergency Expenses: In some cases, startups may use an MCA to cover unexpected expenses, such as equipment repairs or legal fees.
Pros of Merchant Cash Advances for Startups:
1. Easy to Obtain: MCAs are relatively easy to obtain compared to traditional loans, as they typically don't require a personal guarantee or collateral.
2. Quick Access to Capital: MCAs provide startups with quick access to capital, allowing them to respond to business opportunities and challenges quickly.
3. Flexible Repayment Terms: The repayment terms for an MCA are flexible, as the repayment amount is based on the startup's credit card sales. This can make the repayment process less stressful for startups during slow sales periods.
Cons of Merchant Cash Advances for Startups:
1. High Cost: MCAs can be expensive, as the factor rate is often higher than the interest rate on a traditional loan.
2. Daily/weekly Repayments: The periodic repayment structure of an MCA can be difficult for startups, as it requires a constant flow of credit card sales to make the repayments.
3. Reduced Cash Flow: The quick repayment structure of an MCA can also reduce the startup's cash flow, which can make it difficult to meet other financial obligations.
4. Short repayment period: unlike ordinary term loans which can provide the borrower with 3-5 years’ repayment schedule, MCA deals are much shorter and typically the borrower should repay the debt in 3-12 months.
In conclusion, a merchant cash advance can be a valuable financing option for startups, providing them with quick access to working capital and flexible repayment terms. However, startups should carefully consider the high cost and potential impact on cash flow before taking out an MCA. As with any financing option, it's important for startups to fully understand the terms and conditions of an MCA and to identify those specific MCA providers which can fit the company’s profile and specific financial needs.
Disclaimer: The information provided on this text does not, and is not intended to replace or constitute legal, financial or commercial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this text may not constitute the most up-to-date information.