What is Business Cash Advance?

A Business Cash Advance, also known as a Merchant Cash Advance (MCA), is a financing option tailored for small businesses, allowing them to receive an advance on future sales. Unlike traditional loans, MCAs are repaid through a fixed daily or weekly amount deducted via ACH (Automated Clearing House) payments, as per an agreement, until the advance is fully repaid. Both technically are not considered a loan. 

Historically, qualifying for an MCA required businesses to have credit card sales, splitting daily batches between the lender and the merchant. However, this requirement has evolved. Now, businesses do not need to solely rely on credit card transactions to secure a business cash advance. Instead, eligibility is based on average monthly deposits, making it accessible to a broader range of businesses.

This type of funding operates as a future sales or receivables purchase agreement. In this arrangement, the lender provides an advance based on a percentage of the business’s future annual or monthly gross sales. This typically ranges from 50% to 150% of the business’s average monthly deposits or sales or up to 13% of their annual gross sales.

Example: A lender might offer a business cash advance of $50,000 to a merchant who agrees to repay approximately $60,000 over a period of 9 months, or 190 business days (Monday to Friday), with fixed daily payments of $315.78. The rate factor in this scenario would be 1.20.

 Understanding Rate Factor

• Rate Factor: The rate factor determines your payback amount. The lower the rate factor, the lower your total repayment. It is expressed as cents on the dollar, meaning you’re paying 20 cents for every dollar borrowed in the above example.
• Term Impact: The term length influences the rate factor. A shorter term typically results in a lower rate factor, while a longer term may lead to a higher rate factor. Ideally, a longer term with a lower rate factor is preferred for cost-effectiveness.

Since a business cash advance is technically not a loan but an advance, interest rates are not disclosed or converted to an APR. This flexibility allows the seller of the revenue to adjust payments according to fluctuating sales without penalties, accommodating periods when sales may not meet expectations.

What to look out for when getting business cash advance?

• Fees: If you add admin fee, UCC filing fee, ach fees and other fees most of the time you’re paying up to 7.5% in addition to the payments which is you net low. 
• Advance Amount: The lender provides a lump sum based on projected future sales.
• Renewal: Renewing your balance is not interest free. Most MCA renewals tacks on new fee to extend the time of that balance, leaving you with a huge payback and little net to take home during renewal. It’s best to not have a balance when you renew. Loan stacking is debt “death” sentence. You are putting yourself on that perpetual debt trap.
• I Hate Daily Payments: Most will say “I hate daily payments;” however, most of the time it’s not the daily, it’s the broker who put you into the wrong product in the first place. It’s believing when they offer you 120 days that it’s like a line of credit when in reality it’s just a short-term advance. Once you have stacked daily payments that’s where your option for monthly dwindle. You become less likely to qualify for better term. Most people fall for this… 
• Repayment: Most business cash advance will have daily or weekly payment even business term loans. Some line of credit also have weekly payments. Monthly unsecured loan is almost impossible. 
• Term: Repayment terms are usually short, ranging from a few months to few years. Longer the better but sometimes disallows you to borrow again until the renewal threshold, therefore, you fall for a broker who will stack you which then disqualify you for renewal and the debt cycle begins. 
• Line of Credit: MCA is not a line of credit so don’t fall for that sell. MCA is not a loan either. Line of credit doesn’t automatically makes it a monthly payment unless it’s through your local bank.
• UCC Filing: UCC filing is the primary cause of you getting millions of calls and texts. UCC filing is public info. Data Brokers will reverse look up each UCC filing and sell that data to millions of brokers. It’s not Liberty Capital or us that’s selling your info, it’s the data broker.
• Rate Factor: Instead of an interest rate, MCAs use a factor rate to determine the total repayment amount. This is a multiplier (e.g., 1.2 or 1.5) applied to the advance. The lower the better however it can be misleading because a longer term with higher rate factor will be cheaper that a shorter term with lower rate factor. Divide the payment by the borrowed amount will yield you a rate factor. 
• Datamerch: If you’re on Datamerch you’re likely going to have difficulty getting an A type of funding after that.

• Fees: Many will tack on just about anything they can such admin fee, doc fee, UCC filing fee, wiring fee, origination fees and default fee.
• Monthly Payment Options: Everyone prefers monthly payments, but not every lender offers them. Many borrowers go through a lot of trouble to find monthly payment options after juggling multiple daily payments. At that point, their solutions are very limited. It happens a lot. Don’t fall prey work with a trusted lender. Working with a lender doesn’t always mean it’s the right loan. Seek monthly payment before you have 3 daily payments. 
• Renewal: Don’t fall for renewal or stacking. It just ruin you more than help. Renewal and stacking is the one what causes people to dig themselves a deeper hole.

Pros of Business Cash Advances

1.     Quick Access to Capital:

• MCAs can provide funds rapidly, often within a few days, which is beneficial for businesses needing urgent cash flow.

2.     Flexible Use of Funds:

• There are generally no restrictions on how the advance can be used, allowing business owners to address various financial needs.

3.     No Collateral Required:

• MCAs are unsecured, meaning business owners do not need to put up collateral, which reduces the risk of losing personal or business assets.

4.     Approval with Lower Credit Scores:

• MCAs are often available to businesses with poor credit, making them accessible to those who might not qualify for traditional loans.

5.     Predictable Payments:

• The fixed daily or weekly payments provide predictability in managing cash flow, unlike traditional MCAs that take a percentage of daily sales.

Cons of Business Cash Advances

1.     High Cost:

• The factor rates and fees associated with MCAs can result in a much higher cost compared to traditional loans, sometimes equivalent to an annual percentage rate (APR) in the triple digits.

2.     Daily/Weekly Payments:

• Fixed daily or weekly payments can strain cash flow, especially for businesses with inconsistent revenue or seasonal fluctuations.

3.     Potential for Debt Cycle:

• Businesses may fall into a cycle of dependency on MCAs, especially if they are unable to secure other forms of financing due to poor credit. This can lead to multiple advances and increasing debt.

4.     Aggressive Sales Tactics:

• Some brokers push businesses into multiple MCAs simultaneously, leading to overwhelming debt obligations that can be difficult to manage. This often happens when businesses are desperate and accept terms without fully understanding the consequences.

5.     No Improvement in Credit Score:

• Payments on MCAs do not typically contribute to improving the business’s credit score, which limits future borrowing opportunities from traditional lenders

At Liberty Capital Group, Inc., is committed to helping startups succeed by
providing the financial support needed to get off the ground. Most of the time
you will not like what you hear but honesty sometimes hurts but sometimes it’s a motivator. Contact Liberty Capital today to learn more about our business financing options and how we can help your business thrive. We never charge application fee.