What is a merchant cash advance?
A merchant cash advance (MCA) is a kind of financing wherein an establishment makes a lump sum advance in money in return for a percentage of its receipts from future sales. An MCA is not like a traditional loan; it depends upon future receipts rather than specifying a repayment method. Generally, the amounts are repaid daily or weekly, based on the specific sales transacted using a credit or debit card. The repayment amount varies, depending on performance selling, which gives a repayment structure that is flexible but not very predictable.
What is the sale of future receivables?
It entails selling a segment of business future receivables, mainly accounts receivable from its clients or customers, for the immediate cash. Unlike MCA, which is linked to credit card or debit card transactions, the option is related to an invoice or a specified contract that a business expects to realize in the future. The buyer of such receivables then assumes responsibilities for collecting debts.
Key Differences Between MCA and the Sale of Future Receivables
Sources of Repayment:
MCA: Repayment is aligned with the daily credit or debit card sales of the business. If sales are low or high, the repayment amount would also vary.
Sale of Future Receivables: It would be the repayment-based model built on future invoices that the business is expected to collect from customers, offering greater predictability.
Flexibility:
MCA: Again, the most critical advantage or disadvantage of repayment is that it operates flexibly. This means more payments made during high sales seasons and fewer payments during slack periods.
Sale of Future Receivables: The repayment amount is fixed, as it is based on specific receivables, making it more predictable.
Approval Process:
MCA: The approval process for an MCA is quick and generally does not involve rigorous credit checks. Most lenders will only look for sales volume and transaction history records.
Sale of Future Receivables: Generally, this involves much more detailed scrutiny of a borrower's customer base and the quality of their receivables.
Risk and Costs:
MCA: Real fast access to a capital line, but at an overall high cost. The repayment structure usually is charged high fees and factor rates, making the facility, in turn, become an expensive deal over a long run.
Sale of Future Receivables: It can still be expensive; however, the fees are slightly lower than an MCA, depending on the nature and reliability of the receivables.
MCA Debt Restructuring
It helps relieve businesses facing MCA debt by way of restructuring. Basically, MCA debt restructuring involves a change in repayment terms from the lender. This may involve extending the repayment period, reducing daily or weekly repayment amounts, or merging multiple advances into a single loan. It could ease the financial constraints of the businesses noticeably and give them some freedom to regulate cash flow.
Zeus Commercial Capital is a specialist in MCA debt restructuring to offer assistance to businesses that face challenges in restructuring existing debt. Doing so enables businesses to have more favorable terms for repayment and ultimately reduces their financial stress while creating opportunities to grow profitably.
When to Consider Debt Restructuring
It is indeed possible that challenges in business events include:
- Fall behind on MCA repayments
- Operational expense burdened with repayment·
- Debts and credit line cuts
- Legal action or collections risk
Debt restructuring could be a valid solution. It helps the companies restructure their debt in a way that is more sustainable toward the overall repayment schedule and helps avoid default while at the same time allowing those companies to keep operating.
Conclusion
Although they share the advantage of quick funding access, merchant cash advances and the sale of future receivables differ in the ways that they can affect repayment structures, their costs, and possible risks involved. If your business is currently under pressure from MCA debts, restructuring may provide an opportunity to realign repayment terms in order to regain financial stability. Bad Debt Solutions by Zeus Commercial Capital involve restructuring debt pertaining to MCAs while arranging for customized financing programs to suit specific needs. Awareness of these transactional options and restructuring avenues will enable the businesses to make informed decisions and take control of their financial present and future.