Tuesday, April 8, 2008

How a Merchant Cash Advance Works

To create a real world illustration of how a Merchant Cash Advance works, let’s say you have a restaurant. Your restaurant needs $15,000 for remodeling, and you qualify for a $15,000 Merchant Cash Advance to handle the remodeling costs.

First off, here are the players:

  • You and your business

  • The Merchant Cash Advance provider, who gives you the cash

  • Your processor

  • Your customer
The Set Up
To get this money, you would sell the Merchant Cash Advance provider the right to receive a set amount of your future credit card sales – for this illustration, let’s say $20,000.

So you sell $20,000 worth of future credit card sales to receive the $15,000 you need right now. Basically speaking, the $5,000 difference is the cost of the money, which goes to the Merchant Cash Advance provider (*please note, the actual amount going to the provider varies, but it is always clearly established in the terms of a deal). Once you agree with the provider’s terms, shake hands, sign the papers, and it’s done.

You’d get the $15,000 within days and be set up to automatically handle everything with your provider (via your processor). Sometimes this means switching processors to one that has an existing partnership with your provider. If this switch is necessary it can be handled quickly, and depending on the circumstances, may even offer additional benefits to you and your business.

From here, it is really easy.

The Process
Your business would continue to handle business as usual. The only difference now is that when you run a batch on your credit card activity, a fixed percentage of it will be forwarded to the Merchant Cash Advance provider. This continues until the full amount you promised to pay the cash provider is delivered.

So let’s say the agreement calls for you to forward 18% of your batches until the Merchant Cash Advance provider has received all $20,000(*please note, the actual percentage varies, but it is always clearly established in the terms of a deal).

You run a batch report on Monday and see that you have processed $1560 in credit and debit card sales over the weekend. 18% of this is $280.80, so this amount ($280.80) is automatically forwarded to the provider. It reduces the amount of future credit card receipts you owe to $19,719.20. You did nothing different—it was business as usual. Now, however, your credit card processor adjusts your batches to send your provider a fixed percentage until your obligation is fully met.

Does this mean every forwarded amount will be $280.80?
It means that whatever your sales are, 18% of the credit and debit card sales will be forwarded. The percentage is fixed, not the dollar amount. So a busy day means forwarding a little more, a slower day allows you to forward less. Look at this illustration for more detail. It will show you a hypothetical week’s sales and the resulting amount forwarded to AMI:

These transactions will occur every time you batch your credit and debit card sales until your obligation is met in full. Once this point is reached, the provider immediately stops receiving anything from your batches.

The Summary:
And that is the bare-bone basics of a Merchant Cash Advance from start to finish.
1. You qualify.
2. You sell a dollar amount of your future credit and debit card sales in exchange for a lump sum of cash.
3. You make sure the processing and paperwork is addressed, and then you receive your money.
4. You spend it on any business purpose.
5. You continue business as usual. As you batch credit and debit card sales, a fixed percentage is forwarded to the provider through the credit card processor.

Once you’ve met your obligation, collection stops automatically.

Any questions so far?
To keep this easy to digest, let’s stop here. Ours is a unique approach if you are unfamiliar with it, so it sometimes takes a little while to let it all sink in.

No rush…that is why we started this blog. To relax, and get a better understanding of what this is, and how it works. We have also recently developed a simple Flash explanation of what an MCA is and How It Works.

As always, your response is encouraged.


Linda said...

Good for people to know.