Everything You Need to Know About Merchant Cash Advances

(*This is a long article. You should really read the whole thing, but for the TLDR version, you can just skip to here)

In the dynamic and demanding world of trucking, access to financing is not just a step towards growth; it’s a critical component for survival. However truckers also face the challenge of operating in an industry labeled as high risk by many traditional lenders. This often makes securing funding, especially quick funding, quite difficult for your average trucker.

Enter Merchant Cash Advances (MCAs). MCAs can offer a lifeline, especially during times when cash flow is tight, by providing quick access to funds. However, as with any financial instrument, diving into the world of MCAs without a comprehensive understanding can be akin to navigating a treacherous road without a map.

Major banks and retail lenders bore the brunt of a lot of the blame for the market crash of 2008, and rightly so. Leading up to 2008, almost every U.S. bank was playing a dangerous game with their clients and the U.S. economy as a whole.  It was the time of no doc loans, underwriters looking the other way, and in many cases, outright fraud. You know the rest-millions of people suffered as the recession brought about by this recklessness wreaked havoc. 

After the recession, banks were legally required to enforce strict loan requirements, meaning businesses with less than perfect credit scores (anything below 700) would likely be rejected after a long and tedious application process. 

This created a new market-out from which merchant cash advances were born. To help small business owners unable to get funding, companies began offering new non-bank products. The structure of this type of funding was quite inventive; these would not be loans per se, but would be advances on future sales.  This allowed these lenders to fund those who had no shot otherwise, and it also allowed them to operate outside of typical lending/usury regulations.  

The proliferation of merchant cash advance companies notably surged around the year 2010, which continued for well over a solid decade. During this timeframe hundreds of lenders and brokers opened shop attempting to cash in on the ever increasing popularity and ease at which this product functioned. It was like the wild-west. 

The sector continued to expand, quite rapidly, until the Covid pandemic cooled every aspect of the economy. This was a good thing in my opinion, as there were far too many companies operating without scrutiny. Since 2022 some regulatory measures have been instituted, aiming to fortify the safeguards for both the merchants and the lenders.  Things are still not perfect, but they are definitely better. 

At its core, a Merchant Cash Advance is not a loan, but rather an advance based upon the anticipated future sales of a business. An MCA provider extends a lump sum, which is then repaid over a set time frame (3 months, 6 months, etc).  MCAs often look like and act like loans, because at the end of the day they are an infusion of cash, however, they are structured differently. 

MCAs differ from term loans primarily in their repayment structure and qualification criteria. While term loans require fixed monthly payments over a set period, MCAs are repaid through daily or weekly ACH payments.  Additionally, MCAs are typically easier to qualify for and provide faster access to funds than term loans, but they often carry higher costs and shorter repayment terms, making them a more expensive form of financing.

The journey to securing an MCA begins with an application process that’s typically swift and straightforward. Unlike traditional bank loans, which often entail a complex web of paperwork and prolonged approval timelines, MCAs are designed for speed and simplicity. Truckers can apply for an MCA with minimal documentation, get approved, and funded, often within 1 day. This rapid turnaround is crucial for truckers who may need immediate funds to fuel their operations, address unexpected repairs, or capitalize on time-sensitive opportunities.

At the heart of an MCA’s structure are two key components: the factor rate and the holdback percentage. The factor rate, typically ranging between 1.1 and 1.5, determines the total repayment amount. It’s not an interest rate, but rather a multiplier that calculates how much the trucker will repay based on the advance amount. For instance, an MCA of $10,000 with a factor rate of 1.3 means the trucker would need to repay $13,000.

Simultaneously, the holdback percentage is the slice of daily or weekly sales that the MCA provider automatically deducts from the trucking company’s revenues. This percentage, agreed upon at the outset, ensures that repayment aligns with the business’s cash flow. 

Once the MCA is funded, the provider begins to ‘retrieve’ the advanced amount through the agreed-upon holdback percentage. These deductions are made directly from the business’s sales, typically processed through bank accounts via ACH. The frequency of these deductions, whether daily or weekly, is predetermined and hinges on the trucking company’s sales cycle and the mutual agreement with the MCA provider.

This method offers a dual advantage: it aligns repayment with actual revenue, mitigating the risk of financial strain during leaner periods, and it automates the repayment process, allowing truckers to stay focused on the road and their business operations without the distraction of managing loan repayments.

MCAs are known for their rapid approval and disbursement process, which is good for trucking companies that need immediate capital to cover operational costs or seize growth opportunities. Unlike traditional loans, which can take weeks or even months to process, MCAs can provide funds sometimes within 24 hours. This speed is possible because MCA providers typically focus on the company’s future sales potential rather than exhaustive credit checks and complex documentation, making the approval process much faster.

One of the most significant advantages of an MCA is its unsecured nature. For trucking companies, especially smaller fleets or owner-operators, this is a critical benefit. Many trucking businesses may not have the extensive assets or collateral required for traditional loans. This aspect not only eases the borrowing process but also reduces the risk for the trucking company owner, as their personal and business assets are not at direct risk if the business faces a downturn.

One of the advantages of MCA’s lies in their accessibility, particularly for those with less-than-perfect credit histories. Unlike conventional loans that place significant emphasis on credit scores, MCAs prioritize the business’s revenue and daily cash flow. This focus is especially useful for truckers, many of whom are often dealing with credit issues associated with running business in a constantly up and down market.

Factor rates may initially appear more straightforward than APRs. However, they can translate into significantly higher costs when annualized. For instance, a $10,000 advance with a factor rate of 1.3 means the trucking company owes $13,000. If this amount is repaid over a short period, the effective APR can soar, making MCAs a pricier option compared to traditional loans. 

One of the defining features of MCAs is the repayment structure. Repayments are made through daily or weekly deductions from bank accounts. However, this model can also lead to unpredictable cash flows. The frequency and amount of these deductions need careful consideration to ensure they don’t disrupt the business cash flow. Truckers must balance the need for quick access to capital with the imperative of maintaining a healthy cash flow.

The accessibility and simplicity of securing an MCA can be a double-edged sword. While they provide swift financial relief in pressing times, there’s an inherent risk of falling into a cycle of continuous borrowing. This risk is compounded when businesses use subsequent advances to pay off previous ones, leading to a compounding debt cycle that can be challenging to break free from. 

It’s paramount for trucking companies to approach MCAs with a strategic plan, ensuring that they are not just a short-term fix but a part of a well-thought-out financial strategy. Regularly relying on MCAs without a clear exit strategy can jeopardize the financial stability and future growth prospects of a trucking company. 

I would be remiss without mentioning how perilous it can be for truckers to be stuck in the the cycle of either taking on new MCAs to pay off previous MCA balances, or adding several MCAs on top of each other.  Over the years I have worked with many clients trying to dig themselves out the cash flow killer.  Don’t get on the ‘MCA merry-go-round’. It’s never a fun ride.

A factor rate, unlike traditional interest rates, is expressed as a decimal figure, generally ranging between 1.1 and 1.5. This rate determines the total amount you’ll owe upon the maturity of the cash advance. It’s important to note that factor rates are applied to the principal amount, offering a flat fee rather than an interest that accrues over time.

Advance Amount	Factor Rate	Term Length (days)	Total Payback Amount	Daily Payment (M-F)
$25,000	1.45	90	$36,250	$807.07
$25,000	1.45	120	$36,250	$605.30
$25,000	1.45	180	$36,250	$403.20

Behind the scenes, and between the broker and the lender, MCAs have 2 components to them; a ‘buy rate’ and a ‘sell rate’.  These 2 components determine ultimately what rate you will offered.

• Buy Rate: Each lender offers any MCA with their own profit already built in. Another way to think of this is that the buy rate is the MCA’s wholesale price. This does not fluctuate.

• Sell Rate: Each broker has the ability to ‘upsell’ the buy rate by any number of percentage points. This upsell is like the MCA’s retail price and can be as low as 1 or 2 points, or as high as 15 points. Since the sell rate is entirely up to the broker, it can vary widely from one broker to another. One broker might be satisfied with just a few points and another might want to make as much money as possible and offer a very steep sell rate.

The above might seem sneaky or backroom, but it’s really not.  All financial products work in similar ways. Mortgages, car loans, term loans, even SBA loans are all constructed using “wholesale” and “retail” rates.  This allows for financial professionals and brokers to add commission and thus be paid for their services (even BLF). 

However, the MCA industry is problematic because MCAs are already expensive (even at the buy rate) and there is often no restriction on the amount of upsell.  Many, many MCA brokers are not only greedy little pigs, the majority of them are also too dumb and/or lazy to understand the financial implications that they are possibly imposing on that clients.  This is also why few of them ever get a repeat customer (and why Sean does not like them). 

The advance amount is what the MCA lender approves the applicant for.  Several factors of the business contribute to the amount the MCA lender is willing to offer.  Let’s see what each of these are below:

• Owner Credit: Each lender offers any MCA with their own profit already built in. Another way to think of this is that the buy rate is the MCA’s wholesale price. This does not fluctuate.

• Business Credit: Each broker has the ability to ‘upsell’ the buy rate by any number of percentage points. This upsell is like the MCA’s retail price and can be as low as 1 or 2 points, or as high as 15 points. Since the sell rate is entirely up to the broker, it can vary widely from one broker to another. One broker might be satisfied with just a few points and another might want to make as much money as possible and offer a very steep sell rate.

• Time in Business: Each broker has the ability to ‘upsell’ the buy rate by any number of percentage points. This upsell is like the MCA’s retail price and can be as low as 1 or 2 points, or as high as 15 points. Since the sell rate is entirely up to the broker, it can vary widely from one broker to another. One broker might be satisfied with just a few points and another might want to make as much money as possible and offer a very steep sell rate.

• Industry: MCA lenders prefer certain industries over others, especially industries that have predictable and regular cash flow. This is why restaurants, retail establishments, and doctor offices are easier to underwrite than say service industries. It’s also why many MCA lenders don’t like trucking. etc…

• Business Cash Flow: MCA underwriters will look at 4 main aspects of the business cash flow, as per the business bank statements for each month. Let’s explore what they are in the table below.

Item	Description	Why it’s Important	Helpful	Not Helpful
Monthly Revenue	The amount that the business deposits into the bank, on average, for each month. The determining lookback is most commonly the last 3 to the last 6 months.	For obvious reasons, this will indicate the approval size. Expect a maximum approval to be between 50-65% of the average monthly revenue.	The higher the revenue the higher the approval size. Most MCA lenders won’t look at an app with less than $10-12k per month in revenue.	Low revenue amounts will result in low approvals. Or
Frequency of deposits	How many actual deposit days there are for the business.	Businesses with a higher frequency of deposits are more likely to withstand revenue fluctuations in any given month.	Minimum of 10, but the more the better.	Any frequency less than 5 or 6.
Average daily balance	How much is in the bank each day, calculated as an average amount.	The bank needs to be able to cover not just the MCA payback, but all the other monthly expenses.	$3,000 and up.	$0-$3,000
Amount of negative days (NSF) per month	The number of times the balance was less than $0.	Since MCAs are paid back via daily/weekly ACH payments, any negative day would mean they could not pull for that day.	None to 2 or maybe 3	A lot of NSF will decline an application. Especially if the NSFs are in the most recent months.

The main difference between factor rates and APRs lies in the cost structure and the time value of money. APRs are designed to reflect the cost of borrowing over a year(s), accounting for interest as well as additional fees. This makes APRs an annualized rate, offering a clearer picture of the cost over time, especially for longer-term loans.

In contrast, factor rates offer a fixed cost. However, this can be deceiving. When annualized, the effective APR of a cash advance with a factor rate can be significantly higher than traditional loan APRs. This is particularly true if the advance is repaid over a short period, which is common for MCAs. The quicker repayment schedule of MCAs often escalates the effective APR, making the cost of capital substantially higher than it appears when just looking at the factor rate.

	MCA	Term Loan
Original Amount	$10,000	$10,000
Rate	1.3 (factor)	13% (APR)
Repayment Period	6 months	12 months
Total Payback	$13,000	$10,718

Comparing these two scenarios, it’s evident that while the MCA provides quick access to funds, it does so at a premium cost. The term loan, with its lower APR, proves to be less costly over time, albeit potentially more challenging to qualify for and slower to fund.

Understanding these nuances is vital, especially for trucking businesses where cash flow management is pivotal. While MCAs offer a quick solution, they should be approached with a clear understanding of their cost, ensuring they fit within the broader financial strategy of your trucking operation.

• Emergency Use and Growth Opportunities: Utilize MCAs primarily for unexpected expenses or seizing growth opportunities that can offer a high return on investment. For instance, covering repair costs for a truck to keep it on the road or taking on a high-paying freight contract that requires immediate additional resources.

• Understand the Costs: Be fully aware of the factor rates and daily or weekly repayment structure. MCAs are generally more expensive than traditional loans, so it’s crucial to calculate the total cost and ensure the anticipated cash flow from using the advance can cover the repayment and still profit the business.

• Short-term Solution: Treat MCAs as a short-term financing solution. Given the higher cost associated with MCAs, they are not advisable as a long-term financing strategy but can be beneficial in bridging temporary cash flow gaps.

• Negotiate Terms: Don’t hesitate to negotiate the terms with the MCA provider. Some providers might offer flexibility with factor rates or repayment schedules, especially if you have a strong sales record or a longstanding relationship.

• Daily Reconciliation: Keep a close eye on daily cash flow. Since MCA repayments are often made daily or weekly, it’s crucial to manage and monitor cash flow meticulously.

• Budget for Repayment: Include MCA repayments in your budgeting. Ensure that your financial planning accounts for regular withdrawals, and maintain a buffer to safeguard against unexpected downturns in business.

• Communicate with the MCA Provider: If you anticipate cash flow issues, communicate with your MCA provider early. Some providers may offer a temporary adjustment to repayment terms if they understand your situation and have a relationship with your business.

Here are some insightful tips and best practices to ensure that your journey through MCA terrain is safe, strategic, and beneficial to the growth and sustainability of your trucking operations.

• Do Your Homework: Research is key. Dive deep into the background of the MCA provider. Check their track record, read reviews, and gather feedback from other businesses, particularly from the trucking industry. A reputable provider will have a clear history of fair dealings and positive testimonials. Hints-

1. Never, ever, ever do business with an MCA broker who uses an @gmail.com email address. Run!
2. If they have a lousy website (or no website at all) they probably have lousy values. Run!
3. Never take anybody’s word- get everything in writing.
4. Avoid this common bait and switch- “take this expensive loan now to build trust with our lender, then we can get you X”. Run!
5. Don’t let a broker charge you extra fees. Just say no!

• Transparency is a Must: Look for providers who are upfront about their terms, fees, and collection processes. Transparency is critical in avoiding hidden charges that can inflate your debt unexpectedly.

• Trust your gut: Your best advisor is you. If something doesn’t feel right, you’re probably right. If you need guidance you can always ask us.

• Factor Rate vs. APR: Understand the difference. MCAs are priced with a factor rate, not an annual percentage rate (APR). Remember, the value after the decimal point is the total you will owe (ex. a 1.35 factor rate means you are paying 35% for the money).

• Daily or Weekly Withdrawals: MCAs typically require daily or weekly repayments. Ensure this aligns with your cash flow patterns to avoid cash shortages.

• Total Payback Amount: Calculate the total amount you will repay. This includes the advance plus any additional broker fees. MCAs are expensive enough as it is, don’t make it worse by agreeing to pay anything extra. Be clear on this number to assess the cost-effectiveness of the advance.

• Have a Clear Purpose: Use MCAs for specific, short-term needs, not for ongoing financial mismanagement. Whether it’s for buying equipment, bridging a temporary cash flow gap, or emergency expenses, having a clear and purposeful use for the funds is crucial.

• Regular Financial Reviews: Regularly review your financials with a professional, especially someone familiar with the trucking industry’s unique challenges and cash flow patterns. This will help in making informed decisions and avoiding dependency on MCAs.

• Strategic Repayments: If you have a good month, pay more towards your advance. Decreasing your principal faster can lower the total amount paid in fees.

• Avoid Stacking: Taking on multiple MCAs from different providers (stacking) can lead to an unmanageable debt cycle. But many MCA brokers will try to convince you to do this. This is dangerous and only advised if you have a clear exit strategy or are working with a legitimate consultant to achieve a larger goal. If you’re considering a second MCA to pay off the first, it’s a clear sign to reassess your financial strategy.

If used correctly, with the assistance of a reputable company or consultant, an MCA is a financial tool that has plenty of use cases that come with little to no harm to the recipient. It is important to take the time to fully understand how they work before deciding to pull the trigger on one. If you do this you should be fine. 

TDLR Version

1. MCA Overview: MCAs provide truckers with immediate financial support, particularly beneficial in the high-risk trucking industry.
2. Advance Structure: Unlike traditional loans, MCAs are structured around current cash flow instead of credit and tax returns, offering a unique repayment model tied to business revenue.
3. Application Efficiency: The MCA application process is streamlined for rapid approval, ensuring truckers can access funds swiftly, often within 24 hours.
4. Factor Rates: The cost of an MCA is determined by factor rates, which directly influence the total repayment amount over the advance period.
5. Advantages: MCAs offer numerous benefits including quick funding access, lenient credit requirements, and no need for collateral.
6. Potential Risks: While beneficial, MCAs come with risks such as higher overall costs and the potential to disrupt business cash flow.
7. Provider Selection: It’s imperative to carefully choose MCA providers, focusing on their reputation and the clarity of their terms.
8. Repayment Strategy: Aligning repayment schedules with actual business revenue helps manage cash flow effectively.
9. Strategic Use: MCAs should be used thoughtfully as part of a broader financial strategy to avoid falling into a cycle of debt.