Merchant cash advances (MCAs) offer businesses fast access to capital, making them an attractive option for addressing immediate financial needs. However, the repayment methods involved can be intricate and vary based on the provider. In this blog, we’ll delve into how MCA companies collect payments, break down repayment structures, and highlight what Business Debt Adjusters can do when payments become overwhelming.
How Merchant Cash Advance Companies Collect Payments
Merchant cash advance companies use two primary methods to collect payments: deductions from daily credit card sales or fixed ACH withdrawals.
Percentage of Card Transactions
How It Works: The MCA provider partners with your credit card processor to automatically deduct a percentage of daily credit card sales. This percentage, known as the “holdback,” typically ranges from 10% to 20%.
Repayment Dynamics: Payments are proportional to your sales. On days when sales are high, the MCA provider collects more, allowing faster repayment. During slower periods, the amount deducted decreases, offering flexibility.
Example: A business with $1,000 in daily credit card sales and a 15% holdback percentage would pay $150 daily. If sales increase to $2,000, the payment rises to $300.
ACH Withdrawals
How It Works: With Automated Clearing House (ACH) withdrawals, the MCA provider deducts a fixed amount from your business bank account daily or weekly.
Predictable Payments: Unlike percentage-based deductions, ACH withdrawals are consistent, providing predictability. The payment amount is determined by your estimated monthly revenue at the time of the agreement.
Example: A business repaying $28,000 through daily ACH withdrawals of $300 would complete payments in approximately 93 days, regardless of sales volume.
Key Factors in MCA Payment Collection
Understanding the specifics of MCA payment collection can help you choose the right repayment method.
1. Holdback Percentage
- The holdback percentage is critical in percentage-based payments.
- Typical holdbacks range from 10% to 20%, but this varies based on the provider and your business’s credit card sales.
2. Payment Period and Frequency
- MCAs typically have repayment periods ranging from 3 to 24 months.
- Payment frequency is usually daily or weekly, depending on your agreement.
3. Sales Volume and Payment Flexibility
- With percentage-based payments, your repayment timeline adjusts to your sales volume.
- Higher sales mean faster repayment, while slower sales result in extended repayment periods.
Real-Life Examples of MCA Payment Methods
Let’s explore how these payment methods work in practice.
Percentage of Card Transactions Example
- Scenario: A business borrows $20,000 with a factor rate of 1.4, meaning the total repayment is $28,000.
- Repayment: The lender deducts 15% of daily credit card sales. If the business averages $1,000 in daily sales, they pay $150 daily. This results in full repayment in about 187 days (6 months).
ACH Withdrawals Example
- Scenario: The same business opts for fixed ACH withdrawals instead of percentage-based payments.
- Repayment: The lender deducts $300 daily, repaying the $28,000 in approximately 93 days, regardless of sales volume.
Comparing Both Methods
- Percentage-based payments offer flexibility, adapting to sales volume.
- ACH withdrawals provide predictability, ideal for businesses with consistent revenue streams.
How Business Debt Adjusters Can Help with Overwhelming MCA Payments
If merchant cash advance payments are straining your cash flow, Business Debt Adjusters (BDA) can help by renegotiating terms to lower repayment amounts, consolidating multiple obligations into a single manageable payment, and creating tailored financial strategies. Acting as your advocate, BDA works directly with creditors to secure favourable terms, providing immediate relief and helping your business regain stability.
Conclusion
Merchant cash advance companies collect payments using percentage-based deductions from daily credit card sales or fixed ACH withdrawals. While these methods offer flexibility and predictability, they can become overwhelming if your revenue slows or expenses increase. Business Debt Adjusters (BDA) provide the support you need to manage MCA payments effectively, from renegotiating terms to offering tailored financial solutions. If your MCA payments are becoming unmanageable, BDA is here to guide you toward a more stable financial future.