What Is a Merchant Cash Advance?
A merchant cash advance is not a loan. It is a purchase of your future receivables. An MCA company gives you a lump sum today in exchange for a percentage of your future revenue until the purchased amount, plus a premium, is repaid. This distinction matters because it means MCAs fall outside most lending regulations, including usury laws and truth-in-lending disclosure requirements.
How Does Repayment Work?
Most MCAs are repaid through daily or weekly ACH withdrawals from your business bank account. The amount is either a fixed dollar amount or a percentage of your daily credit card receipts. Repayment terms typically range from 3 to 18 months.
What Is a Factor Rate?
A factor rate is how MCA companies express their cost. Instead of an interest rate like 15 percent, they quote a factor rate like 1.35. You multiply the advance amount by the factor rate to get the total repayment amount. A $100,000 advance with a 1.35 factor rate means you repay $135,000.
Can I Default on an MCA?
Yes, and defaults are common. When you default, the funder will typically file a breach of contract lawsuit, attempt to enforce a confession of judgment, file or enforce a UCC lien against your business assets, and contact your customers or accounts. Default does not mean the end of your business. There are legal strategies available to negotiate settlements, challenge confessions of judgment, and restructure the debt.
Are MCAs Legal?
Yes, merchant cash advances are legal. Several court challenges have attempted to reclassify MCAs as loans subject to usury laws, but most courts have upheld the purchase-of-receivables structure. However, the legal landscape is evolving with new disclosure requirements in several states.
Will an MCA Affect My Credit Score?
Most MCA funders do not report to consumer credit bureaus, so the advance itself typically will not lower your credit score. However, if you default and the funder obtains a judgment or sends the debt to collections, those actions can impact your credit.
What Should I Do If I Cannot Make My MCA Payments?
Do not ignore the problem. Contact an attorney who handles MCA disputes before you miss a payment if possible. The window for negotiation narrows quickly once a funder decides to pursue enforcement.