What is Merchant Cash Advance
Merchant Cash Advance (MCA) is a financial tool specifically targeted to businesses generating cashless sales (debit or credit card). MCA provides immediate cash to a business in exchange for future card sales. The funds are repaid through automatic daily or weekly deductions from the card sales.
It is really important to manage your repayments efficiently to avoid putting extra financial strain on your business.
Basic working and repayment structure of MCA
This is how MCA mostly works in most business industries:
- A business applies for MCA to get access to cash
- The MCA provider assesses the financial health of the business to analyse the risk associated with the repayments. In simpler words, to get an idea of whether the business will be able to pay back.
- If the application gets accepted, the business and the provider both sign a contract.
- The terms and conditions are finalised after discussion among both parties.
- After the formal procedures are done, the funds get delivered to the business.
The repayment process starts as soon as card sales are generated after attaining the MCA funds. A fixed percentage of each card sale (5%-15%) is deducted automatically. This means that the repayment conditions are flexible, you pay more when you make more card sales and vice versa. The process continues until the capital amount plus the fee is repaid.
Factor rate of MCA
The factor rate is the fee charged by the MCA providers. It is calculated as a percentage or in decimals. It is decided by the provider and the business at the time of agreement and remains fixed. For example, a factor rate of 1.1 or 10% means that for every £500 borrowed, you pay back £550 from your future card sales.
6 Steps to effectively manage MCA repayments
Spend MCA funds smartly
Smartly use the MCA funds to tackle urgent expenses first, like paying your employees, and suppliers, buying inventory, or clearing utility bills. Do not overspend, and try to clear the urgent expenses first.
Keep track of cash flow
After you have fulfilled the urgent expenses, evaluate your remaining cash for your remaining secondary expenses. This will give you an idea of your current cash flow. At this point, you should have expenses that are not due soon, and all the urgent expenditures are taken care of.
Regularly view business performance
View your business performance regularly to see if you are on track to progress. Use key performance indicators like the number of your products, revenue, and pending expenses. You should be seeing stability and improvement after utilising it for a while.
Avoid taking multiple MCAs
Try to avoid taking multiple MCAs at once. This can result in your repayments being overlapped which would automatically reduce the profitability of your business.
Prioritise high-margin sales
You can strategically increase your profitability by focusing on high-margin products during your MCA repayment period. High-margin products contribute more toward your bottom-line revenue and less toward your total sales volume. You can speed up your payment process like this by paying more from your high-profit sales.
Think For The Future
You should be entering an MCA agreement with a long-term plan for your future. Be proactive and think of sustainable ways to stabilise your business revenue and cash flow model. For example, you could follow this strategy: first, allocate a portion of the MCA fund to clear out your urgent bills. Once that’s done, take on profitable projects to contribute more towards your repayment and revenue. After that, make a fund to contribute towards long-term strategies to help your business grow organically. It could be launching a new product, expanding your business, or producing premium products.
In times of cash flow constraint, businesses should make use of the financial solutions available to them. Regular repayments during MCA can make the process sail smoother than ever. To further leverage the best advantages of MCA, choose a competitive and reliable provider. ComparedBusiness can help you during this process so you can choose the right MCA provider suited to your business industry.