A business cash advance, also known as a merchant cash advance (MCA), is a lump sum provided to a small business in exchange for a portion of the company’s future receivables. In exchange for the lump sum, a lender withholds a predetermined percentage of future sales to pay back the purchased price of the merchant cash advance. The payback can either be via a portion of a business’ future credit card sales or a fixed ACH payment from their business bank account. If only one lending party provides the capital for a cash advance, that lender absorbs all the potential risk of default. When many partners syndicate on a deal, the risk is disbursed and diminished, and the reward is distributed proportionally. Usually, in syndication, at least one partner takes on a more significant percentage of risk, and one partner assumes the responsibility of tracking, reporting, and collecting remittances.
Yield in a Low-Interest Rate Environment
Banking as we know it is undergoing a paradigm shift. Fewer and fewer banks are serving the local needs of consumers and small businesses. Peering into the future, it is easy to see that many of these banks will no longer be a resource for capital on small and medium-sized enterprises. Merchant Cash Advance is the next generation financing product for small and medium business owners. Analysis of the economic situation suggests there will be a strong, growing demand for capital from these companies. This will result in a dynamic and expanding marketplace and an excellent opportunity for lenders. In exchange for providing funds, competitive potential returns are offered to lenders with their interest secured by the funding portfolio itself.
HOW IT WORKS
1. Merchant is approved for a $100,000 Advance against the future revenue of the company. The term of the Advance is 100 days. Since the contract is in the form of a
Revenue Purchase Agreement and not a loan, it is assigned a factor rate, which is the fixed cost of money. The factor rate in this example is 1.40. Meaning that the Merchant
would repay $140,000 over the 100 day period. The Advance would be repaid $1,400 per day and would be withdrawn electronically every day as a set percentage of the
Merchants daily collections.
2. The Merchant accepts the signs of the terms and returns the contract. The Monies are forwarded to the Merchant by ACH or Bank Wire.
3. Advance amount is split between Syndicate Members on a first-come basis. In the particular case, if there were 10 Syndicators with each syndicating $10,000, each would be repaid a gross amount of $14,000. It is recommended that each Syndicator syndicate in a minimum of 10 contracts as a means of risk management and diversification.
merchant cash advance
Business Owner Benefits
Merchant cash advance syndication allows investors and business owners to conduct transactions that are beneficial to both parties outside of the traditional banking structure. For syndications, merchant cash advance deals offer reliable opportunities for returns with the flexibility to make loans of any size, including those that are typically too small for other types of lenders. For business owners, these deals are a chance to access working capital quickly, without credit checks and the lengthy process required by banks. For entrepreneurs, this kind of lending can be especially helpful in getting fast funding for growth even when they aren’t in the position to get a traditional bank loan.