Should You Consider A Merchant Cash Advance (MCA) For Your Business?

In today’s uncertain business landscape, MCAs are a pretty common alternative for cash-strapped business owners. When cash-flow is low and the bills are piling up, taking out a quick cash advance might seem like a good idea, but it might turn out to be a very expensive one.

When taking out a Merchant Cash Advance, many people do not realize the costs associated with these advances, which may end up in the triple digits, creating a cycle of debt difficult for business owners to get out of.

So how do MCAs work? Unlike your traditional business loans, where banks loan you money at a certain interest rate, the cash advance provider purchases your future sales  – which you have to repay along with other fees.

There are two options to repay an MCA cash advance. There is a percentage-of-sales option, where the merchant automatically deducts a percentage on a daily/weekly basis of your sales until the advance is repaid in full. The second option is a fixed withdrawal from your bank account based on the estimated revenue for the month. Notice the word estimated in the last sentence, that means that if you have a good month (better than the estimated calculation) – you’re in the clear. But what about those months when business is slow? You still have to repay a fixed amount, which can be stressful when you’re trying to stay afloat.

From this information, you might think that MCAs don’t sound too bad, but it gets tricky when you take into consideration the “other fees” portion. Instead of charging an interest rate like a traditional loan would, MCAs charge what is known as a “Factor Rate” (not to be confused with Factoring) which usually ranges from 1.1 to 1.5. 

NerdWallet does an in-depth analysis of how the calculation works, which you should look at HERE. But to briefly summarize it, if you’re approved for a $50,000 advance at a 1.4 factor rate, your repayment amount will be a [whopping] $70,000! That is $20,000 in fees – alone!

We highly recommend doing your due diligence and being extremely careful with Merchant Cash Advance Providers. 

And remember, if you need fast cash for your trucking business, always consider factoring first before taking out an expensive MCA. A good factoring company, like us here at Thunder Funding, will have crystal clear pricing from the get-go, so you can have peace of mind and quick cash-flow. To learn more about our services click HERE.

For more information about starting your own trucking business be sure to check out this blog post: Thinking of Starting Your Own Trucking Business?

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