A merchant cash advance (MCA) can be a valuable asset for your business because it gives you quick access to capital.
Let’s explore how an MCA calculator can help you understand and assess an MCA.
Components of the MCA calculator
Inputs
Estimated credit card sales: The MCA calculator uses a percentage of your business’s monthly credit card sales to determine the daily payment.
Term: The number of months it will take to pay back the total payback amount.
Factor rate: This input is the multiplier the MCA calculator uses to compute the payback amount.
Outputs
Advance amount: The actual dollar amount you receive.
Daily payments: The daily amount from estimated sales you pay to the MCA company.
Payback Amount: The total amount you will pay back is the advance amount times the factor rate.
These totals are dependent on the advanced amount and factor rate. However, this simple activity gives you the data to make an informed financial funding decision.
Understanding a Merchant Cash Advance
A merchant cash advance (MCA) occurs when a funding company buys your company’s future receivables at a discount. For example, suppose you sold $11,000 of future revenues for a $9,000 advance. Subsequently, the funding company would collect the total balance owed of $11,000 by making daily draws of a set percentage of credit card revenues. These draws would come directly from your business credit card payment processor.
One of the main differences between a merchant cash advance and traditional financing is that there are no interest rates. Also, the repayment term limit is flexible, and the repayments can be adjusted according to your revenue intake. These key components of an MCA will help you further understand how this funding option works.
Advance Amount
The amount your business is eligible to receive depends on your company’s revenue and your history with the funding company. The MCA calculator will display the exact funding amount you will receive in the advance amount window.
Factor Rate
Usually expressed in decimal form, the MCA factor rate determines the cost of capital. Businesses typically receive it in decimal form (ex., 12% equals 1.12). So, before receiving your factor rate quote, you can get an idea of your payment amount by inputting different factor rates in the MCA calculator. The MCA company will base the factor rate on the applicant’s creditworthiness.
Term
Since the term is usually less than 12 months, the MCA funding company defines the terms based on your business’s short-term objectives. The term includes the lending period and total payback amount. For these figures, the MCA calculator can calculate the total payback amount by multiplying the advance amount by the factor rate.
Daily Payment
An MCA gives your business flexibility by basing your daily payment on the percentage of your daily credit card sales. Since daily credit card sales vary, your payment amount automatically adjusts to your business’ performance. The funding company determines the percentage of credit card sales withheld.
