Everything You Need to Know About Merchant Cash Advances

1. Introduction

1. How the Industry Started

The Financial Crisis of 2008

Boom Town

2. Understanding Merchant Cash Advances

What is a Merchant Cash Advance?

MCAs vs. Traditional Loans

3. The MCA Process

Application

Understanding Factor Rates and Holdback Percentages

Paying Back: Daily or Weekly Deductions from Sales

4. Advantages of Merchant Cash Advances for Truckers

Quick Access to Funds

No Collateral Required

Spotty Credit is (usually) OK.

5. Risks and Considerations

Higher Cost of Capital: Factor Rates vs. Traditional Loan Interest Rates

Impact on Cash Flow: Navigating Daily/Weekly Sales Deductions

Risk of Debt Cycle: The Lure of Continuous Borrowing

6. Analyzing the Cost: Understanding Factor Rates

How Factor Rates Are Calculated

Table: Factor rate examples
Advance AmountFactor RateTerm Length (days)Total Payback AmountDaily Payment (M-F)
$25,0001.4590$36,250$807.07
$25,0001.45120$36,250$605.30
$25,0001.45180$36,250$403.20

How Factor Rates Are Set

  • 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.

How the Advance Amount is Determined

  • 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.
Table: Business cash flow analysis
ItemDescriptionWhy it’s ImportantHelpfulNot Helpful
Monthly RevenueThe 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 depositsHow 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 balanceHow 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 monthThe 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 3A lot of NSF will decline an application. Especially if the NSFs are in the most recent months.

Comparison with APRs (Annual Percentage Rates) of Traditional Loans

Table: Comparing a $10k MCA vs. Term Loan
MCATerm Loan
Original Amount$10,000$10,000
Rate1.3 (factor)13% (APR)
Repayment Period6 months12 months
Total Payback$13,000$10,718

7. Uses of Merchant Cash Advances for Truckers

Best Practices for Utilizing MCAs Effectively:

  • 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.

Tips for Managing Cash Flow to Accommodate MCA Repayments:

  • 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.

8. Tips and Best Practice

Choosing a Reputable MCA Provider:

  • 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.

Understanding the Terms and Conditions

  • 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.

Strategies to Avoid the Debt Cycle

  • 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.

BLF is here to assist you

Our goal is to provide you with expert help and guidance for you needs. Whether you need funding or business services for your trucking company, you are in reliable hands.

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