Merchant cash advance

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A merchant cash advance(MCA) was originally structured as a lump sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales. [1] The idea originated from Barbara Johnson, who needed funds for her small business franchise. As a result, Barbara, her husband Gary, and Les Falke co-founded AdvancMe, the first MCA company, which later became CAN Capital. The term Merchant Cash Advance (MCA), first used by Les Falke to label AdvanceMe's product, is now commonly used to describe a variety of small business financing options characterized by purchasing future sales revenue in exchange for short payment terms (generally under 24 months) and small regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. The term "merchant cash advance" may be used to describe purchases of future credit card sales receivables or short-term business loans.[ citation needed ]

Contents

Concept

Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses' daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with payment processors and then take a fixed or variable percentage of a merchant's future credit card sales. [2]

These merchant cash advances are not loans – rather, they are a sale of a portion of future credit and/or debit card sales. Therefore, merchant cash advance transactions are not subject to state usury laws that limit lenders from charging high-interest rates. [3] Critics argue that, as a consequence, they operate in a largely unregulated market and charge much higher rates than banks. [4] On 10 June 2016, a New York Supreme Court judge presiding over a published merchant cash advance case ruled that "if the transaction is not a loan, there can be no usury," adding also that asking the court to convert an agreement to sell future receivables into a loan agreement "would require unwarranted speculation." [5]

This structure may have some advantages over the structure of a conventional loan. Payments to the merchant cash advance company fluctuate directly with the merchant's sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner's personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan. An example transaction is as follows: A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or debit card sale until the entire $25,000 is collected. [6]

Usage

Merchant cash advances are most often used by retail businesses that do not qualify for regular bank loans and are generally more expensive than bank loans. [7] Competition and innovation led to downward pressure on rates and terms are now more closely correlated with an applicant's FICO score. [8]

Small businesses take out loans and cash advances when they believe that the opportunities offered by expanded financial assets will outweigh the costs. Small businesses that don't have the cash on hand to fund an expansion by themselves could rely on external funding, such as a merchant cash advance. [9]

Some advantages are fast approvals, funding within 2 days, minimal documentation, bad credit will not turn you down. Disadvantages include: Short repayment terms, anywhere between 4 and 18 months, daily or weekly payments, higher interest compared to traditional banks.

Midsize or small business owners who cannot qualify for traditional business loans have the ability to secure a Merchant Cash Advance (MCA) . However, obtaining one differs from obtaining a secured or unsecured loan.

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<span class="mw-page-title-main">Debit card</span> Card used for financial transactions, usually without a credit line

A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either the front or the back. Many of the new cards now have a chip on them, which allows people to use their card by touch (contactless), or by inserting the card and keying in a PIN as with swiping the magnetic stripe. These are similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardholder's bank account at the time of the purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

<span class="mw-page-title-main">EFTPOS</span> Type of electronic payment system

Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit cards or credit cards, at payment terminals located at points of sale. EFTPOS technology was developed during the 1980s.

<span class="mw-page-title-main">Debits and credits</span> Sides of an account in double-entry bookeeping

Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.

<span class="mw-page-title-main">Factoring (finance)</span> Financial transaction and a type of debtor finance

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.

<span class="mw-page-title-main">Accounts receivable</span> Claims for payment held by a business

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<span class="mw-page-title-main">Credit</span> Financial term for the trust between parties in transactions with a deferred payment

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<span class="mw-page-title-main">Payment card</span> Card issued by a financial institution that can be used to make a payment

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A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A financial institution makes available an amount of credit to a business or consumer during a specified period of time.

Merchant services is a broad category of financial services intended for use by businesses. In its most specific use, it usually refers to merchant processing services that enables a business to accept a transaction payment through a secure (encrypted) channel using the customer's credit card or debit card or NFC/RFID enabled device. More generally, the term may include:

<span class="mw-page-title-main">Interchange fee</span> Fee paid between banks for card-based transactions

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank pays a customer's bank.

Discover Financial Services is an American financial services company that owns and operates Discover Bank, an online bank that offers checking and savings accounts, personal loans, home equity loans, student loans and credit cards. It also owns and operates the Discover and Pulse networks, and owns Diners Club International. Discover Card is the third largest credit card brand in the United States, when measured by cards in force, with nearly 50 million cardholders. Discover is currently headquartered in the Chicago suburb of Riverwoods, Illinois.

<span class="mw-page-title-main">Credit card</span> Card for financial transactions from a line of credit

A credit card is a payment card, usually issued by a bank, allowing its users to purchase goods or services or withdraw cash on credit. Using the card thus accrues debt that has to be repaid later. Credit cards are one of the most widely used forms of payment across the world.

<span class="mw-page-title-main">Bank</span> Financial institution which accepts deposits

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<span class="mw-page-title-main">Rede S.A.</span>

Rede known as Redecard is a Brazilian multi-brand acquirer with 25 brands in its portfolio, for credit, debit and benefit cards. Its activities include merchant acquiring, capturing, transmission, processing and settlement of credit and debit card transactions, prepayment of receivables to merchants, rental of POS terminals, check verification through POS terminals, credit card machine and the capture and transmission of transactions using benefit-voucher, private-label cards and loyalty programs such as Multiplus. The company is the first largest in its sector. The company was traded in BM&F Bovespa and disclosed in 2012, 24, September.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

Merchant factor may refer to:

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<span class="mw-page-title-main">Affirm Holdings</span> U.S. financial services company

Affirm Holdings, Inc. is an American public company founded by PayPal co-founder Max Levchin in 2012. It is a fintech company with a buy now, pay later service for online and in-store shopping. Affirm leads the U.S. buy now, pay later sector, and reports 17.6 million users and US$20.2 billion annual GMV as of 2023.

References

  1. ↑ Tozzi, John (9 January 2009). "How Merchant Cash Advances Work". BusinessWeek . Archived from the original on 21 January 2009. Retrieved 11 July 2011.
  2. ↑ Loten, Angus (18 August 2011). "The Lure of Cash Advances". Wall Street Journal . Retrieved 18 August 2011.
  3. ↑ Farrell, Maureen (31 January 2008). "Look Who's Making Coin Off The Credit Crisis". Forbes.com . Retrieved 11 July 2011.
  4. ↑ Elizabeth S. Bennett and Nitasha Tiku. "Thanks, But No Thanks". Inc. Retrieved 4 December 2012.
  5. ↑ Murray, Sean (11 June 2016). "Merchant Cash Advance Definitely NOT a Loan, New York Judge Rules". deBanked.com . Retrieved 7 December 2016.
  6. ↑ Goodman, Michelle (11 June 2012). "Case Study: How A Merchant Cash Advance Worked in a Pinch". Entrepreneur.com . Retrieved 21 May 2013.
  7. ↑ John Tozzi (9 January 2009). "How Merchant Cash Advances Work". Bloomberg . Retrieved 8 November 2016.
  8. ↑ "FICO Score". Investopedia. Retrieved 6 December 2021.
  9. ↑ "Business finance and loans | Small Business Development Corporation". www.smallbusiness.wa.gov.au. Retrieved 6 December 2021.
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