MCAs are repaid based on a multiple of the money advanced to you. For example, take a $100,000 advance with a 1.25x factor rate and a 15% split of credit card receivables paid daily. This example requires the merchant to pay back $125,000 using 15% of their credit card sales every day. The payback time is triangulated to be between 6 -18 months based on historical sales and seasonality, though they’re usually paid back in less than a year.
The ACH debit version of the product draws a fixed daily amount from a merchant’s bank account until the advance and the factor fee amount is repaid. MCA APRs can range from ~30% to 100%+. Their short duration and rapid repayment limits the exposure of the lender but elevates APRs. Check out this article for a more detailed analysis of true MCA rates.
A few things to note about MCAs. (i) They’re legally not a loan but a sale of future receivables. As such, they won’t help build business credit. (ii) MCA providers are underwriting your top line sales, so it’s easier for asset-light or unprofitable businesses to be approved. (iii) They are best used by B2C businesses with healthy daily sales volume (restaurants, salons, etc) for short term funding needs. This product is also a good fit for borrowers that may have been turned down for a business loan because of low credit.
Two notable entrants into MCAs over the past few years are payment processors PayPal and Square. Their entry was a logical step as they control the payment channels and hold a wealth of data on their merchants. The expansion has been resoundingly successful for both companies. In 2015, Square Capital and PayPal Working Capital originated over $400 million and $900 million, respectively. Both are now among the top 10 largest MCA originators in the world.
Note, Square recently announced that they would no longer be offering a pure MCA product. Instead, through a partnership with a bank, they are now offering a unique loan product that has a fixed term of 18 month but is still repaid with a split of credit card sales. Analysis on why they made the switch can be found here.
Accounts Receivable Financing (Factoring, ABLs, Dynamic Discounting, PO Financing) is the purchase of or lending against commercial paper, invoices, receivables, trade acceptances and contract rights. It’s an ancient form of financing, with the earliest recorded mention in the Code of Hammurabi in 1754 B.C. There are many related versions of receivables financing but the most commonly used by small businesses are outlined below.