A merchant cash advance agreement is a contract between a lender and a borrower in which the lender agrees to provide a cash advance that will be repaid with the company's future income. The borrower agrees to pay a commission, usually in the form of a fixed interest rate, which is outlined in the contract. A Merchant Cash Advance (MCA) allows an MCA provider (Buyer) to purchase future sales using the merchant's (Seller) credit or debit card. The amount of the refund depends on the sales volume of the merchant.
Unlike loans, merchant cash advances involve the buyer of future receivables assuming the risk of default. Merchant cash advance contracts are more accurately defined as the buying and selling of future accounts receivable agreements. These MCA agreements will generally illustrate a total amount of future receivables purchased by the MCA company. An MCA is not a loan, but rather a commercial agreement in which the business owner sells their future sales by credit card or other commercial receipts to the MCA fund provider.
Merchant Cash Advances (MCAs) are financial products that should not be confused with loans. When applying for an MCA, the lender will analyze the company's credit card receipts to determine if they have the ability to pay funds based on their daily credit card sales. An agreement is established between the small business owner and the MCA provider regarding the amount of the advance, the amount of repayment, the withholding and the term of the advance. Once an agreement is made, the advance is transferred to the company's bank account in exchange for a future percentage of credit card receipts.
Instead of charging interest, merchant cash advance providers charge a single flat fee, which is calculated by multiplying a “factor rate” (sometimes called a “purchase rate” or “one-time flat rate”) by the amount of the loan. The application process for an MCA is not as complicated as a traditional loan, making it a quicker option for businesses needing access to capital quickly. However, due to having to switch between payment processing services or using an MCA provider that works with their current payment processor, there is potential for faulty payment processing agreements or bad advances. Merchant cash advance contracts contain clauses that benefit lenders as well as clauses that work for borrowers.
If your business is struggling to pay an MCA due to decreased or disrupted income or cash flow, you should ask your lender for an adjustment in your payment schedule. Common law generally recognizes that for an advance to qualify as a loan, it must be unconditionally repayable. In conclusion, merchant cash advances are not subject to state usury laws that limit lenders from charging fees and are usually calculated to be repaid in 18 months or less.
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