Merchant cash advance services is a rapidly growing industry. It basically did not exist as an industry at the turn of the 21st Century. Within the past 15 years, however, it has grown into an industry with over 50 MCA firms advancing hundreds of millions of dollars each year. The largest and oldest firm in the field, AdvanceMe, expects to advance over one billion dollars to business owners in the next three years.
Most reputable MCA providers belong to the North American Merchant Advance Association (NAMAA), formed in 2006 in partial response to counteract the deceptive practices of some companies. The trade group has set best practice ethical guidelines that include full disclosure of fees and how balances are paid off. NAMAA president David Golden claims that "most of the bad apples were cleaned out of the industry during the recession."
When comparing providers, here are some tips:
- Check to see if the provider is a NAMAA member. You can find a list here: http://www.northamericanmaa.org/members.htm
- Understand the terms and all fees. Above all, be absolutely clear on how much money you need to pay back. Talk to your accountant, because it is easy to lose sight of what you are actually required to do. For example, a lender might demand 10% of your daily credit card receipts until you pay back the agreed-upon amount. But 10% is not your financing charge, which is calculated by comparing the cost of financing with the amount financed, and could be as high as 90 percent. Verify if there are minimum payment requirements: Do you have to make up the difference if credit card sales fail to generate the minimum payment?
- Calculate the APR. Remember, the percentage of your credit card transactions you are paying every day is not the same as the percentage rate you're paying on the advance. Ask what the annual percentage rate (APR) is and what it would be if you were to get the same amount as a bank loan.
- Make sure there are no origination fees, closing costs, application fees, statement fees, or any other kinds of fees. While these might be standard for a bank loan, they are not for a merchant cash advance. There have been cases where third-party brokers add these fees.
- Make sure you have a realistic picture of your business and your ability to repay the advance. Merchant cash advances are an expensive way to finance a business, but can be essential for companies with widely fluctuating cash flows. Remember that MCAs get paid first -- off the top, usually before the money ever touches your bank account -- and you won't be able to use that money to pay any other bills until the MCA is paid off.
- Beware of alternative payment arrangements. Some merchant cash advance companies have different payment arrangements than split funding, where the credit card processor makes the daily advance repayment directly. These include:
- Escrow payments. The credit card processor deposits daily receipts in an escrow account as an Automated Clearing House (ACH) transaction; once the MCA provider receives its percentage of funds, the balance is released to the merchant.
- Debit payments. The MCA company debits payment from the merchant's bank account through ACH.
- The problem here is that you allow third parties to control your cash flow. You don't have access to your receipts for at least a day, sometimes more, before ACH processing is completed. In the case of debit payments, you're allowing the MCA company access to your bank account; there have been cases in which an MCA company has withdrawn additional funds beyond the regular payment, citing as cause a contractual violation (such as promoting cash payments from customers). The simplest and safest repayment method is split funding. If the MCA company you're considering cannot accommodate split funding, it's easy enough to find a more flexible MCA provider.
- Don't exceed your capabilities. The ceiling rate (the percentage advanced) should not exceed 10% of gross sales. Most reputable MCA providers have adopted this principle as an industry best practice. So should you. An MCA provider willing to advance you more than you can reasonably expect to repay is not doing you a favor.
- Shop around to get the best deal. While there are a couple of dominant players, the MCA industry today is highly competitive. Compare rates and payment plans and get the best one.