Comparing MCA Quotes

Many clients call AFS all the time when shopping for the best rates for a merchant cash advance. Most of the time the first question is, "What is your best factor rate?" While this is one important part of the quote, you cannot compare it without the second part of the equation which is the withholding rate.

At AFS we've written contracts from a factor rate of 1.1 (providing $10,000 in funding for $11,000 of future credit card receivables) all the way up to a 1.5 (providing $10,000 in funding for $15,000 of future credit card receivables). They key element is how fast do you expect the MCA provider to be collect the amount of the contract.

For example, a merchant that does $20,000 per month on credit cards consistently. Might get a quote for $20,000 in funding with factor rates of 1.3 and 1.4 from two different companies. If they both have the same withholding rate of 30% of credit cards then its easy to identify which is the best deal.

If the 1.3 factor rate has a withholding of 25%, we would expect the MCA provider to collect the $26,000 over 5.2 months. Now if the 1.4 factor rate quote has a withholding of 20%, the MCA provider will collect over 7.0 months. As a business owner the merchant will need to ask him or herself two important questions:

1. Is the higher factor rate worth the longer payback period?

2. Can my cash flow afford the withholding percentage?

Often we have clients that want a factor rate of less than 1.2 and generally MCA providers have no problems with providing a low factor rate. In fact, MCA providers generally prefer lower factor rates, because they collect on those contracts over a shorter time frame, thus lowering their risk on funding the contract. However, most reputable MCA providers also recognize that they can quickly put a merchant out of business if they withhold too much of business' credit card sales. Most MCA providers limit the amount that they expect to collect from a merchant to 11 to nine percent of the business total gross sales.

When comparing quotes remember the old time/value of money rule. The longer you have the funds, the more it is going to cost due to greater risk of default. Don't forget to deal with only reputable companies that have a proven track record and will around for the long haul to support your business for years to come. Most MCA providers offer discounts on subsequent contracts since the merchant has demonstrated a proven track record in paying back a contract.