Merchant cash advances

How it works

A merchant cash advance is commonly structured as a purchase of future business receipts rather than a conventional loan. Contract structure and legal treatment vary. Payments may be linked to receipts or collected through scheduled debits, depending on the agreement.

Where it can fit

Assess the specific cash need, expected sales, and payment burden before comparing this product with a line of credit or term loan. Speed is only one dimension. A business needs to understand how collections operate during a weak sales period.

Look closely at the trade-offs

A factor rate is not an annual interest rate. Review the total purchased amount, fees, net cash received, reconciliation provisions, guarantees, default triggers, and renewal economics. Do not assume paying early reduces the purchased amount.

Translate the offer into a calendar

An MCA label does not explain how cash will leave your bank account. Obtain the advance, deductions, total purchased amount, collection method and reconciliation provisions in one place. The FTC’s small-business financing review identifies issues around costs, disclosures and collections. Those concerns make the written mechanics more useful than a marketing promise about speed or flexibility.

Source: FTC: Strictly Business Forum staff perspective

Worked example: headline funding versus usable funding

Assume a fictional advance of $50,000 carries a 1.30 factor and a $2,000 fee withheld from funding. The business receives $48,000. The factor produces a $65,000 contractual collection amount, so the difference between the usable cash and that amount is $17,000 before any other charges. The factor is not an APR and dividing it by an estimated term does not produce a reliable annualized borrowing cost.

If the illustrative agreement collects $650 on each of 100 collection days, a week with five collection days requires $3,250. Suppose the business normally has $2,400 left each week after operating expenses. The proposed collection exceeds that weekly surplus by $850. The funded project would need to generate additional cash or the business would need another identified source. A profitable annual income statement does not resolve this weekly timing mismatch.

Examine low sales and early payoff separately

Ask the provider to show what happens if receipts fall, which records support a reconciliation request and when a change would take effect. Do not assume collections decline automatically because the product references sales. Also request a written early-settlement quote methodology. Finishing collections sooner may not reduce the total amount due.

For a renewal, separate money used to satisfy the existing obligation from genuinely new cash deposited. Put both obligations on the same timeline until the old one is actually discharged. Have the security, guarantees, default provisions and local disclosure rules reviewed for the specific contract; product names alone do not establish its legal treatment.

Keep a daily balance projection for the first month, especially around payroll and tax payments. Use the proposed debit dates rather than spreading the total evenly across a month. Then mark the date on which the financed purchase is expected to generate usable cash. If withdrawals begin well before that date, the operating business must carry the gap. Ask the provider to explain any mismatch before signing, instead of relying only on the size of the initial deposit.

• What amount reaches my account after every deduction?
• Are collections tied to actual receipts or a fixed estimate?
• How does reconciliation work, including deadlines and evidence?
• What amount is payable if I settle early or refinance?

Your next-step checklist

• Net proceeds and total purchased amount
• Payment and reconciliation terms
• Existing advances and debits
• Early-payoff and default provisions