Merchant Cash Advance

A merchant cash advance is a short term business loan typically secured by the company's future credit card sales. Sometimes referred to as MCA, the basics of these short term business loans are fairly simple. An MCA provider extends cash to a business in return for an agreed upon percentage of future credit card sales. For example, a business may get a $20,000 advance at a cost of $27,000. The cost is repaid generally over six to ten months through the business' credit card sales.

The percentage of credit card sales that a merchant cash advance company will take to repay the advance varies from one provider to the next. One factor that an MCA provider will consider is the profit margins of the business receiving the loan. For those companies with thin margins, the percentage of credit card sales taken each month often is less. Regardless of the percentage, however, the full cost of the advance must be repaid.

Typicall, merchant cash advance lenders collect between 8% and 10% of gross credit card sales until the cost of the advance is repaid. With companies operating with thin margins, however, the percentage can be as low as 1%. According to a Business Week article, AdvanceMe has a self-imposed limit of 9%.

Like most short-term loan providers, the merchant cash advance industry has not been without its opponents. Many believe that these purchases of future sales are really loans at illegal interest rates. In 2007, for example, a federal court in California granted summary judgment against a company, ruling that the advances were really loans subject to California's interest rate cap for unlicensed lenders (10%).

Recognizing that the industry is not currently regulated, some merchant cash advance providers have formed the North American Merchant Advance Assoication. The NAMAA website describes the organization as follows:

The North American Merchant Advance Association (NAMAA) is a not-for-profit trade association representing organizations in the United States and Canada that are in the business of providing working capital advance products based on credit, debit or other card and electronic payment-related revenue streams to small and mid-sized businesses (currently referred to as a "Merchant Cash Advance"). NAMAA provides guidance and helps to influence and shape the merchant cash advance industry through leadership, education and the sharing of information.

The board of directors of NAMAA is made up of executives from four Merchant Cash Advance providers: Reach Financial, LLC, RapidAdvance, LLC Business Financial Services, LLC, and Amerimerchant, LLC.

Ccash advances to businesses began about 10 years ago with with a company called AdvanceME, then located in Georgia. In its first year of operations, AdvanceMe advanced less than $10 million to businesses. Today there are 50 or more MCA providers, who advance a combined total exceeding $700 million a year.