A merchant cash advance (MCA) is a type of business funding in which the funder is paid by taking a percentage of the businesses' revenues or sale proceeds. The term Merchant Cash Advance is commonly used to describe a variety of small business financing options characterized by purchasing future sales revenue in exchange for short payment terms (generally under 24 months) and small regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans.

History

The merchant cash advance was originally structured as a

lump sum A lump sum is a single payment of money, as opposed to a series of payments made over time (such as an annuity). The United States Department of Housing and Urban Development distinguishes between " price analysis" and " cost analysis" by whether ...

payment to a business in exchange for an agreed-upon percentage of future credit card and/or

debit card A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either ...

sales. The idea originated from Barbara Johnson, who needed funds for her small business franchise. As a result, Barbara, her husband Gary, and Les Falke co-founded AdvancMe, the first MCA company, which later became CAN Capital. The term Merchant Cash Advance (MCA), first used by Les Falke to label AdvanceMe's product, is now commonly used to describe a variety of small business financing options characterized by purchasing future sales revenue in exchange for short payment terms (generally under 24 months) and small regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. The term "merchant cash advance" may be used to describe purchases of future credit card sales receivables or short-term business loans.

Concept

Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses' daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with

payment processor A payment processor is a system that enables financial transactions, commonly employed by a merchant, to handle transactions with customers from various channels such as credit cards and debit cards or bank accounts. They are usually broken do ...

s and then take a fixed or variable percentage of a merchant's future credit card sales. These merchant cash advances are not loans – rather, they are a sale of a portion of future credit and/or debit card sales. Therefore, merchant cash advance transactions are not subject to state

usury Usury () is the practice of making loans that are seen as unfairly enriching the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in e ...

laws that limit lenders from charging high-interest

rates Rate or rates may refer to: Finance * Rate (company), an American residential mortgage company formerly known as Guaranteed Rate * Rates (tax), a type of taxation system in the United Kingdom used to fund local government * Exchange rate, rate ...

. Critics argue that, as a consequence, they operate in a largely unregulated market and charge much higher rates than banks. On 10 June 2016, a New York Supreme Court judge presiding over a published merchant cash advance case ruled that "if the transaction is not a loan, there can be no usury," adding also that asking the court to convert an agreement to sell future receivables into a loan agreement "would require unwarranted speculation." This structure may have some advantages over the structure of a conventional loan. Payments to the merchant cash advance company fluctuate directly with the merchant's sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner's personal

credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...

s, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan. An example transaction is as follows: A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or

sale until the entire $25,000 is collected.

Usage

As of 2009, merchant cash advances are most often used by retail businesses that do not qualify for regular bank loans and are generally more expensive than bank loans. Small businesses take out loans and cash advances when they believe that the opportunities offered by expanded financial assets will outweigh the costs. Small businesses that don't have the cash on hand to fund an expansion by themselves could rely on external funding, such as a merchant cash advance.

References

{{reflist Credit card terminology Debit cards