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September 10, 2022
10 min read

Don't rely on a merchant cash advance (MCA) for long-term growth

What is a merchant cash advance (MCA)?

A merchant cash advance (MCA) allows a business to access a loan by promising to pay it back with a percentage of future sales, plus a fee. Popularized by companies like Wayflyer, Clearco, and Shopify Capital, MCAs are frequently utilized by small ecommerce brands that need immediate, short-term cash infusions for anything ranging from inventory, accounts receivable, marketing spend, and more. Despite their benefits, which we’ll cover shortly, MCAs frequently carry high annual percentage rates (APRs) and fees that, if left unchecked, can handicap or destroy your business’s profitability.

How an MCA works

  • A MCA provider lends you a predetermined amount of money, often based on your historical revenue.
  • You agree to pay back that amount of money within a set period of time, plus a flat fee, by giving the MCA provider a specific percentage (frequently 10-20%) of your gross daily sales until you achieve the owed amount.

Here’s an example of how a basic MCA works:

You are loaned $100,000 but are required to pay back $108,000. You’ll do so by giving the lender 20% of your gross daily sales until you reach $108,000. 

The benefits of a MCA

1. Fast financing

An MCA is great if you need money immediately. Providers review applications quickly and deploy funds fast – in some cases an infusion of cash can arrive in your bank account within hours. 

2. Easy approval requirements

Aside from providing access to store data (like a Shopify or Amazon account), you won’t need to provide excessive reporting, liens on collateral, or covenants. Because MCAs are based on future revenue, they don’t require a good or long credit history.

3. Automated repayments based on your sales

Repayments are made based on daily sales and withdrawn directly from your bank account or store account. 

4. Cheaper than equity

Unlike equity, which requires you to share profits (or losses) with an investor forever, MCAs only require you to pay a pre-determined royalty for a fixed period of time.

5. Automated repayments based on your sales

Repayments are made based on daily sales and withdrawn directly from your bank account or store account.     

The consequential negatives of an MCA

1. Expensive

For growing brands, MCAs are frequently one of the most expensive forms of capital on the market. MCA providers rarely disclose an APR by claiming there is no interest rate (instead they use a set loan fee based on a “factor rate”). But by calculating the fees, payback period, and other loan elements, you can calculate an MCA’s APR, which frequently exceeds 30%.

These high rates are due to the fees and rapid payback pace MCAs require. To illustrate this, if you loan $100,000 and are asked to repay $108,000 in a year, then you are paying 8% effective annual interest. But if you loan $100,000 and repay $108,000 in a week, then you are paying over 300% effective annual interest. With MCAs, the payback period is frequently 15 weeks, based on the $100,000 loan example above, that’s a ~55% effective annual interest rate.

2. Hidden fees and penalties

Aside from the fixed loan fee (or interest payment for all intents and purposes), administrative, underwriting, and deployment fees are not only expensive but unavoidable. When these fees are included, the already high effective interest rate can easily double. 

3. The MCA treadmill

Due to a MCA’s high fees and daily sales clawback, utilizing an MCA can significantly impact your cash flow and quickly spiral into a cycle of debt, especially if your business requires another loan and you can’t qualify for other, more affordable financing options.

4. No early prepayment benefit

Since fees are fixed before the loan is granted, you can’t save on interest by repaying early.

5. Inflexible and short-term

MCAs are usually too expensive and rarely provide enough capital to be a practical long term solution.

6. Confusing contracts

MCA contracts are confusing and notoriously difficult to compare due to the mirky nature of MCA factor rates, fees, and repayment schedules. MCA providers rarely provide an APR, making it nearly impossible to compare different providers and negotiate for a better offer.

7. Incompatible with other debt and MCAs

If you have any form of senior debt, it is unlikely you will be eligible for an MCA because your existing lenders will likely forbid or strongly discourage MCAs due to the sales percentage repayment process.

Combining MCAs can be devastating too, as multiple-MCAs can force you to commit a massive share (30%+) of your daily sales to loan clawbacks. This would significantly reduce your free cash flow, leaving you with less money to buy inventory, pay suppliers, and keep your business running. 

Highbeam’s integrated banking solution provides better credit

A banking line of credit is the most affordable and flexible way to finance your business. For growing ecommerce brands, however, attaining a sizable loan from a traditional bank is nearly impossible.

As a banking partner designed for growing ecommerce brands, Highbeam is a long-term partner that understands your ecommerce business and its unique financial needs. Highbeam’s integrated banking solution allows founders to not only access ecommerce focused banking solutions and financial analytics tools, but also simple, transparent, and long-term credit.

1. Fair and transparent credit

Highbeam provides brands with no fee and transparent credit with a fair and easily understood APR (usually in the mid-teens).

2. Credit comparison tool

Highbeam empowers you to seek the best credit offering for your business, whether that is an MCA or not. Through its free credit comparison tool, Highbeam allows you to calculate the real APR of all MCA and credit products you are considering, ensuring you make the most informed financing decisions for your business.

3. Real-time flexibility to match your cash needs

Never pay for unused credit that simply sits in your bank account. Highbeam only charges interest on the cash you use. This provides you with peace of mind and a convenient line of credit, without making you pay for unused capital. 

To illustrate this, if you have a $100,000 Highbeam line of credit, but only use $1,000, you only pay interest on that $1,000 until it is repaid.

4. Instant cash infusions

By banking with Highbeam, we ensure credit is made available when you need it with approval and activation within 24 hours. 

5. No prepayment penalties

Pay down your credit utilization on your schedule with no fees or penalties. While Highbeam provides you with a sales drawback auto payment schedule, there are no costs to paying back your loan early.

6. A Partner for your brand’s long-term growth

Highbeam allows you to finance your business on your terms. As a banking solution built for ecommerce, we provide brands with the financial tools and insights they need to manage and understand their cash flow. We are ecommerce experts and your long term strategic partner to help you grow your brand at each step of the way.

Find out how much credit you qualify for by signing up for Highbeam today.

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