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Education

How MCAs became the supply Aware of this daunting challenge fac-
ing SMBs, innovative lenders came
of capital for SMB owners up with a different kind of funding
solution. Typically, whenever a busi-
ness needs capital to continue its op-
erations, the first option to consider
is a term loan. However, this option
often takes time before funding is ap-
proved, and requirements for qualifi-
cation may be out of reach for startups
without an established credit record.
Enter, merchant cash advances

By Chad Otar Rather than relying on a business's
Lending Valley Inc. creditworthiness to determine how
much to offer in funding, some lend-
he most significant problem most small and midsize businesses ers turned to something more readily
(SMBs) face is funding, especially at the start when the business is accessible: revenue. Just as the name
still trying to lift off the runway. Many startups fail to obtain suf- suggests, the difference between this
T ficient funding by traditional means at this stage and close shop, and a loan is that it is an advance on
while others find alternative ways to raise capital. future sales. In the case of a merchant
cash advance (MCA), the potential
For the lucky ones, it is as easy as asking the venture capitalists backing them to lender will look at the cash flow re-
provide more funding, and since the VCs are already invested, they will often cords of the business to estimate how
provide more capital. However, many entrepreneurs don't have this luxury, much they can advance.
and the options quickly become scarce.
Of interest are the merchant's sales,
based on daily gross sales, since
those figures can be more easily veri-
fied and repayments made. Once the
amount of cash advance is agreed
upon, the business receives the ad-
vance within a short period. The fee
for the advance is based on a speci-
fied percentage of daily sales, and
payments are typically made daily or
weekly.
How does it work exactly?

To better understand how an MCA
works, consider a company that, say,
sells custom made clothes. When this
company needs capital to continue
its operations, the owner applies for
a merchant cash advance. The lender
assesses the company's records and
decides to offer an advance of $10,000.
Of course, this must come at a cost,
referred to as a simple fee for the cost
of capital.

Once the business receives the money,
it will owe the lender $10,000 plus the
simple fee. Repayment periods usu-
ally range from three to 18 months.
Payments are customarily deducted
daily or weekly from credit card
transactions, and/or total daily or

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