What is merchant cash advance (MCA)?

Merchant cash advance is a financing option for businesses that allows them to get an advance of cash in exchange for a portion of their future sales, typically credit card transactions. In this arrangement, a business receives a lump sum of money upfront and agrees to repay it through a percentage of daily or weekly credit card sales, plus a fee.

What is revenue-based financing (RBF)?

Revenue-based financing is a method of raising capital for a business where repayments are tied directly to the company's revenue. In this case, a company receives upfront capital and agrees to repay it through a fixed percentage of its ongoing revenue until the total amount paid reaches a predetermined cap.

How are MCA and RBF similar?

Payment flexibility: Both MCA and RBF payments are based on a company's sales or revenue, offering more flexibility than fixed payment loans.

Quick access to capital: Both provide quick access to funds, often with less stringent approval requirements than traditional loans.

No collateral required: Typically, neither require collateral, reducing risk to business assets.

How are MCA and RBF different?

Repayment structure: MCA repayments are based on credit card sales, while RBF repayments are tied to overall revenue.

Cost of capital: MCAs often have higher fees and shorter repayment terms, making them more expensive. RBF usually has a predetermined cap on total repayments, potentially making it more cost-effective over time.

Suitability: MCA is often better for businesses with high credit card sales, while RBF is more suited for businesses with steady overall revenue.

Key information for borrowers

Costs and fees: Understand the factor rate for MCAs and the repayment cap for RBF. These determine the total cost of financing.

Repayment terms: Be aware of how daily or weekly sales will impact your ability to repay the MCA or RBF.

Cash flow impact: Both options should be chosen considering the business's cash flow to avoid strain on operations.

Eligibility requirements: Check the requirements, as they are typically less stringent than traditional loans but vary between financiers.

Long-term impact: Consider how these financing methods fit into your long-term financial strategy. They are often used for short-term needs.

Advantages of MCA and RBF

Flexibility: Payments adjust based on business performance, providing cash flow flexibility.

Ease of access: Quicker and easier access to funds compared to traditional loans.

No collateral risk: Unlike secured loans, there's no risk to business assets.

Focus on revenue: Especially for RBF, the focus is on the business's overall health and not just credit scores.

Closing thought

While MCA and RBF offer unique advantages, particularly in terms of flexibility and ease of access, they may come with higher costs compared to traditional loans. It's crucial for SMB owners to carefully assess their business’s financial health and cash flow to ensure these financing options align with their short-term needs and long-term goals.