A merchant cash advance (MCA) is an alternative source of funding for small businesses that may not have access to credit. An MCA is far more complicated than a bank loan or line of credit, however, and the interest rate for the advance is frequently confused with the holdback amount. Ultimately, an MCA is very expensive financing and defaulting on the repayment terms could result in a business bankruptcy.
At ReconcileMyMCA.com, we have a proven history of helping small businesses throughout the nation reconcile their merchant cash advances. If you are facing a default on an MCA, your business and personal assets are at risk. When you consult with us, we will take the time to understand the terms of your cash advance, evaluate your financial position, and explore all your options.
Above all, we will always work in your best interests and help to protect the business you’ve worked so hard to build. Please contact our office today by completing the convenient intake form. Our debt relief specialists are available 24/7.
Understanding the Holdback Amount in a Merchant Cash Advance
MCA providers evaluate risk and credit criteria differently than a bank or other lenders. They look at daily credit card receipts to determine if a business can repay the advance in a timely manner. As such, the cost of an MCA is typically much higher than other financing options. By understanding the terms you are being offered, you can determine whether an MCA is the right choice for your business needs.
In particular, the repayment terms of a merchant cash advance differ greatly from a traditional bank loan. One key difference is referred to as a “holdback” or the holdback amount. This is the percentage of daily credit card sales applied to repay your cash advance.
The holdback percentage, not to be confused with the interest rate, is typically between 10 and 20 percent and fixed until the advance is paid in full. Because repayment is based on a percentage of the daily balance in your merchant account, the more credit card transactions your business does, the faster you’ll be able to repay the advance.
Difference Between Holdback Amount and Interest Rate
It is important to note the difference between the interest rate you’re being charged for the advance and the holdback amount.
The interest rate is tied to a factor rate, usually between 1.2 and 1.5. Unlike a traditional term loan, the rate isn’t amortized over the course of the advance. When the factor rate is converted into an annual percentage rate, however, you may actually be facing a rate between 60 and 200 percent. By contrast, the holdback amount is the daily draw from your merchant account until the advance, plus interest is paid in full. In short, the interest rate is the cost of the advance while the holdback amount applies to your daily payment.
As an example, if you receive a $10,000 advance at a factor rate of 1.2 ($10,000 x 1.2 = $12,000) the cost of the financing would be $2,000. If the holdback percentage was 10 percent and $2,000 was deposited into your merchant account today, your daily payment would be $200.
What if my business defaults on a merchant cash advance?
It is common for cash advance agreements to include a clause known as a “Confession of Judgment” whereby you accept liability for the advance and waive any defenses for nonpayment. If you default on an MCA, the provider will be able to obtain a judgment from the court to seize your business assets. Moreover, it is common for MCA providers to require business owners to sign personal guarantees, which means your home and other personal assets will also be at risk if you default on an MCA.
How ReconcileMyMCA.com Can Help
Although a merchant cash advance can provide a business with quick access to working capital, the costs are high. It is critical to understand the factor rate, and the holdback amount, and how it will affect your cash flow. Ultimately, repaying a merchant cash advance hinges on your business having a consistent flow of daily credit card receipts.
If you are currently struggling to meet the terms of a merchant cash advance, turn to ReconcileMyMCA.com. Our legal team will negotiate new repayment terms of the advance with your MCA provider and compile the necessary documentation showing that your business will return to profitability. If the MCA provider refuses to honor the agreement and reconcile the advance, we will take them to court for breach of contract
The sooner you contact our office, the sooner we can reconcile your merchant cash advance. For the prompt, efficient, and reliable debt relief services we provide, please complete the convenient intake form.