MCA and ACH Advance Comparison
There comes a point during a business cycle where a small business finds itself in need of immediate cash to cover short term business expenses. While having access to conventional bank lending is always preferable, its just not always realistic in the real world. Banks have approval rates that are very low (sometimes as low as 20%) and have the ability to pick and choose files in search of the lowest risk opportunities to fund. If your business lacks consistent profitability a conventional lender won’t even listen to you. But even having decent financials isn’t enough to guarantee a traditional lender approves funding. They’ll also look at personal credit, personal net worth, as well as the company’s collateral. If you lack in any of those areas you’re probably going to find yourself locked-out from a bank. Another option may be to try an SBA loan because the Small Business Administration enhancement – which reduces their risk exposure by having the government guarantee to cover a percentage of the lenders’ losses. But if you don’t meet the SBA requirements, you’re left looking for alternative options. Alternative loans are a good option for businesses that may not be consistently profitable, and lack hard assets — like commercial real estate — to use as collateral. The upside to alternative lending is that the credit requirements are lower than that of conventional business lenders, and the funding process can take days — not weeks and months like banks and credit unions. But you still need decent – not necessarily great – credit to get an alternative loan. But if you have bad credit you’re not going to have many true “loan” options. But there are other options in the form of factoring or cash advances.
What is a Cash Advance?
Cash advances are a form of short term business financing where a small company sells its a portion of it’s future revenue. The factorer or “funder” will purchase the receivables in exchange for upfront cash at a discount to the lender. Cash advances are a B2B transaction and aren’t considered actual loans. Since they are not considered amortizing loans, cash advance companies aren’t regulated in ways traditional and alternative “lenders” are.
What is a MCA Loan?
An MCA loan (or merchant cash advance) is the sale of a company’s future credit card processing receivables in return for immediate financing. Merchant cash advance lenders will forward the business or merchant an amount of money and then take a percentage of the borrower’s credit card deposits each day until the loan is repaid. Since the remittance is taken as a percentage basis, if the merchant or company sees a dip in credit card deposits during any particular day or week, the amount that is sent to the funder is automatically decreases, too. Therefore, a MCA doesn’t require a fixed amount paid back each day.
Merchant cash advances are either structured as split withholding repayment (where the processing company splits each days revenue with the merchant) or as a lock-box repayment (where all deposits are put into a bank account controlled by the cash advance company, and each day the advance company sends the merchant their share – usually a day or two later).
What is an ACH Advance
An ACH advance is very similar to a merchant cash advance, the only difference is instead of using the company’s credit card processing statement cash-flow to determine funding and repayments, the funder instead uses the small business’s bank account deposits and bank statement cash-flow to determine funding and repayment. After funding, the business cash advance funding company will then receive repayment by making an ACH deduction directly from the company’s bank account on a daily or weekly basis. As opposed to MCA’s daily repayment (where a percentage is withheld of each day’s transactions) an ACH loan requires a fixed daily payment.
How Many Cash Advances Can a Small Business Get?
When it comes to MCA loans (using credit card processing) a merchant can usually only get one advance. This means that only one lender will be able to remit payments directly from the company’s credit card processors. With an ACH advance, a business can have multiple advances at all times. Company’s have been known to have 2, 3, 4 and up to 9 positions (advances) at one time. Generally an ACH lender won’t consider an MCA facility to even by a position, as its not reflected on the company’s bank statements/deposits.
Can a Business Consolidate Advances?
Short answer: yes. But its not easy. For merchants looking to refinance a merchant cash advance, they usually have to have their loan 50% paid, or must qualify for another merchant cash advance that is offering a funding amount twice the size of the current balance. Same is true with an ACH loan, but sometimes a merchant only needs to net 25% of the loan amount (after the other advance lender is paid-off) to consolidate their advances. With that having been said, its never easy to get advances consolidated. Fact is, cash advance lenders are skeptical of consolidations because they are worried that once they are consolidated the small business will then seek out another cash advance and put the 1st lender at risk on not being repaid because of the stress the new advance will put on the business’s cash-flow.
How Long Does it Take To Get a Cash Advance
Cash advance funding times vary depending on company being used for the cash advance, as well as the total funding amount. The larger the funding amount, the more due diligence required by the lender. Generally cash advances over $100,000 triggers the needs to increase DD during the underwriting process. That also means the funder may require more documents. While a smaller cash advance only requires a credit application, bank statement and/or credit card statements, a larger cash advance may require AR summary, profit and loss statement and even tax returns.
With that having been said, a small cash advance can be funded very quickly — usually the next day (although there are some funding company’s that can even fund the same day). A larger cash advance between $100,000-$1,000,000 or longer term cash advances may take a full week or more to complete funding.
Can You Save Money By Paying Off Advance Early
The answer: sometimes. Please keep in mind that a cash advance is a sale of future revenue — not a loan. Therefore it doesn’t operate using an interest rate or APR. So paying off early doesn’t in itself save you money. Generally you need to work out an agreement with the cash advance company before funding spelling out how you could save a certain amount of money if you pay-off early. Not every funding company is willing to offer such savings, but there are plenty that are. Fact is, getting paid early at a discount beats not being repaid at all. Therefore an accepting an early payoff at a discount may be worth it from a lender’s risk perspective.
How Does a Cash Advance Renewal Work?
After a company is funded and has made consistent payments, a funder may be willing to offer new funds after the borrower has paid off half the loan. But there’s a catch: renewals can be very costly to the merchant. Since MCAs involve business sales contracts, the funding company doesn’t just provide new funds, they require buying out the existing amount owed. So say a merchant gets a $10,000 advance, and pays it down 50% (leaving a $5,000 balance) the funder will then buyout the remaining $5,000, and offer $5,000 in new funds ($10,000). The borrower will then have to pay back the new amount PLUS INTEREST. Therefore that $10,000 will have additional interest added to it (even though the business only netted $5,000).
