What a merchant cash advance is (and is not)

A merchant cash advance (MCA) is a purchase, not a loan, at least on paper. A funder pays a business a lump sum today and in exchange buys a fixed dollar amount of the business's future receivables: its card sales and bank deposits. The business then delivers those receivables a little at a time, through a share of each day's sales or a fixed daily or weekly debit, until the purchased amount has been paid in.

The amount purchased is called the RTR (right to receive) or payback. It is set on day one by multiplying the advance by a factor rate. A $25,000 advance at a 1.35 factor means the funder has bought $33,750 of future receipts. There is no interest rate and, in a true MCA, no fixed maturity date.

payback (RTR) = advance amount x factor rate
$25,000 x 1.35 = $33,750

A term loan is debt. The borrower owes principal plus interest on a schedule, the lender can demand repayment whatever happens to sales, and interest accrues on a declining balance. An MCA is written as a sale of receivables, and several features of the contract exist to support that structure:

The last three rows are the ones that matter. Reconciliation lets the merchant ask for payments to be adjusted to actual receipts. The lack of a fixed term means the funder's money comes back slower when sales drop. And the owner's personal guaranty is usually written to cover performance (not diverting receipts, not switching bank accounts) rather than repayment itself.

Whether a given advance is really a purchase or really a loan in disguise has been argued in court many times, because a lot rides on it: loan treatment can bring usury limits and other lending rules into play. Courts and commentators have generally looked at the substance of the deal, not its label. The questions that come up again and again are whether the reconciliation right is real and usable, whether the term is genuinely open or effectively fixed, and whether the funder has recourse against the owner if the business simply fails.

Outcomes have gone both ways and depend on the contract and the state, so nobody in a sales role should tell a merchant how a court would treat their deal. What a broker should know is why the clauses exist, and that a contract which removes the risk from the funder invites the argument.

MCA merchants are small businesses with steady deposits that need money fast or cannot get a bank loan: restaurants, auto repair shops, trucking companies, contractors, medical and dental practices, retailers, salons. Many have been open for under two years, have thin or bruised personal credit, or have no hard collateral. Common reasons for taking an advance:

• Speed. Offers often come back the same day and funding can follow within a day or two of a signed contract.
• Approval based on cash flow. Funders lean on bank statements more than credit scores or collateral.
• A short, specific need. Inventory before a busy season, a broken walk-in cooler, payroll while a large invoice clears.
• Repayment that flexes (in theory). With a percentage holdback or reconciliation, a slow month means smaller remittances.

The trade-off is cost. Factor rates repaid over a few months translate into a high annualized cost, which the factor rate lesson works through. A good broker places the advance when it fits the need and points the merchant to a cheaper product, such as a line of credit or term loan, when they qualify.

Every deal in Ferrylend carries its product (MCA, revenue-based financing, an SBA loan, a line of credit, a term loan, equipment finance or factoring) and its deal type, so the same pipeline holds advances and loans side by side (deal pipeline). When an offer comes in, the offer calculator turns the advance and factor into payback, net funding, payment, estimated term and holdback as you type, so you can explain the numbers on the call.