Best Merchant Cash Advance for Small Business Advice: Should Black Entrepreneurs Use This Option? - Black Enterprise
Black Enterprise Magazine July/August 2018 Issue

Traditionally, African American business owners have always had a tough time obtaining financing to grow, develop, and sustain their businesses. When business owners cannot obtain the capital they need from traditional financial institutions, they usually turn to alternative ones.

One of the growing sources of alternative business capital since the Great Recession, has been that of the Merchant Cash Advance (MCA), along with its sister product, the Alternative Business Loan. A company by the name of AdvanceMe (today the company is known as Can Capital) brought the MCA concept to the marketplace in the very early 2000s and even tried to patent the concept, but wasn’t successful.

But it wasn’t until the credit crunch of the 2008 recession that business owners began turning to the MCA product in high numbers, leading to an explosion of said industry. You have to be cautious using these alternative means of capital, so I am going to present the best merchant cash advance advice to you.

 

The Best Merchant Cash Advance for Small Business Info

Here’s how the MCA works: A business is doing $60,000 a month in credit card processing volume, for example. That business could be approved for about $60,000 in terms of the advance amount, which can be used for any business purpose, such as covering payroll.

The lender might set up the business with what is known as a  “factor rate,” which translates into a total payback amount of $72,000. To pay back the advance, the lender might hold 20% of the daily credit card processing volume of the business (which, in this example, comes to around $400) and apply this amount to the total outstanding payback balance.

As long as the business maintains the same level of monthly credit card processing volume, then the entire payback amount would be satisfied in six months. An MCA offer based on the above example would look like the following:

  • Advance amount: $60,000
  • Factor rate: 1.20
  • Total payback or purchase amount: $72,000
  • Holdback percentage: 20%

Note that the MCA is not considered a traditional loan with fixed terms, so if the monthly credit card processing volume of the business in this example drops to $50,000, then instead of six months to pay off the total payback amount, it might take just over seven months to complete. As a result, this product works best for businesses that are seasonal.

 

The Alternative Business Loan

Unlike the MCA, an Alternative Business Loan is structured as a real business loan with origination fees and fixed terms. Approval is based on 5% to 10% of the annual gross sales of a business, so if a business is doing $2 million a year in gross sales, it might get approved for $150,000. To pay back the loan, the lender will set up a fixed payment that comes out of the business owner’s bank account every business day. For the terms, let’s say the lender offers the business owner a 15-month option with a 28% interest rate. Here’s how the complete offer would look:

  • Loan amount: $150,000
  • Origination fee: $4,500 (based on 3% of loan amount)
  • Final disbursement amount: $145,500
  • Cost expense (interest): $42,000
  • Total repayment amount: $192,000
  • Daily business day payment: $508 (represents 378 business day payments over the next 15 months)
  • Term: 15 months

Should You Use One Of These Products?

Many experts believe business owners should never use the MCA or Alternative Business Loan, calling the products “payday loans for small businesses,” due to the fact that, at times, the annual percentage rates (APR) of the products can get up to 350%.

Having offered both of these products to numerous small business owners across the country, I believe the products can work for certain business owners in certain situations. For example, I have normally recommended the products as a form of bridge financing, which is just a tool to help get a business owner over a short-term/temporary “hump,” but with a focus on eventually getting them back into a position where they are able to take advantage of traditional (and more cost-effective) business financing options.

As a business owner, you would have to determine whether or not the MCA or Alternative Business Loan product might work for your current financing needs. As a financial professional, I recommend using the products for short-term/temporary financing issues rather than as a long-term, business financing strategy.

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John Tucker

John Tucker is an M.B.A. graduate, with over 11 years of experience working within the Commercial Finance sector. For over 11 years, Tucker has helped large and small businesses succeed through innovative financing, technology and risk management solutions, which have helped grow, develop, and sustain their business. Tucker established himself financially from being homeless, to today having a net worth in the high percentile range. Besides holding an M.B.A., Tucker also has three bachelor's degrees in Accounting, Business Management, and Journalism, with alma maters that include The University of Michigan and Western Governors University.


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