Daily MCA Payments of $500, $1,000 or $2,500: Calculate the Revenue and Cash Required

Holdback Is What They Set Aside Every Day

You agree to pay, say $500 a day, and they take that $500 out of your card receipts every day until it is all paid off. You’d need a business generating $5,000 a day to be able to afford a payment of $500 every day, if you want to hold back 10 percent of sales. At a holdback of 20 percent, the same $500 daily payment would require a cash-drawer take of at least $2,500. Doubling that payment to $1,000 per day would require a $10,000-a-day business with a 10 percent holdback, or $5,000 with a 20 percent holdback. Push it to $2,500 a day, and you’re looking for $25,000 with a 10 percent holdback or $12,500 daily with a 20 percent holdback.

Over 21 business days, $500 a day is $10,500, $1,000 a day is $21,000, and so on. Holdback is what they set aside every day. The factor rate decides the total size of the payback. You should understand the difference. If they say “20% holdback,” that’s only their daily take. Assume a daily holdback of 10 percent, but some credit-card advance companies hold back up to 20 percent every day.

A restaurant making $80,000 a month in cards would send $12,000 to the funder (15 percent x 80,000). Since, for credit-card advance purposes, there are roughly 21 business days in every month, $12,000 works out to about $571 every business day.

Some merchant cash advance companies will take a fixed daily ACH payment of, say, $100 each business day. This guarantees a set revenue flow for them. Whether your sales are low or high, they take the same money. Other companies tap straight into your credit card transactions and skim a fixed percentage daily. They’re called split withholding, and they offer a degree of flexibility. When sales slow down, the company takes less of your money. With ACH withdrawal, that won’t happen.

If you’re going to use ACH withdrawal, you have to budget for a bad day. Or a bad month. An average daily revenue stream is the wrong number for that budget. It must be low enough that you can meet the number on your lowest grossing business days. You can’t use your busiest days. Always plan a worst-case scenario: what is your slowest day? What is your slowest week? What is the lowest monthly figure you’ve seen?

If you think an advance is beyond the reach of the New York Attorney General, read up on City Bakery, a former bakery in Manhattan. Its owner had to pay Yellowstone Capital more than $2,000 a day before the bakery closed. At 10 percent holdback, that required $20,000 in credit card transactions every day. With a 20 percent holdback, it was down to $10,000. Last year, the New York Attorney General found that Yellowstone’s advances were, for all the world, short-term loans, with interest rates of up to 820% a year.

Cost of Funds

You need to be careful about the cost of funds, which is more important than the stated amount of money you’re asking for. Let’s say you borrowed $40,000. At a factor rate of 1.3, your total payback becomes $52,000, a $12,000 cost.

Taking a $50,000 advance from a merchant cash advance firm at a cost of 1.40 would require a total payment of $70,000 over about six months. You’d have 126 debits of $555.56. Spread over six months, the cost is about 142% APR. Same fee over four months would be closer to 212%. This is how people get into trouble. New York State requires lenders to disclose a projected APR on amounts up to $2.5 million for New York businesses; most states don’t. It is on you to do the math yourself.

Do a Stress Test

Unless you work up a sales projection to see how it would impact daily cash, you can never tell what would happen. Pay dates for employees and rent usually come once a week or a month, but a credit card advance is withdrawn from your bank account daily, every business day. If your best sales come in late in the month, and your big paydays are at mid-month, you’re likely to have a cash squeeze. Do a stress test: what would happen if you cut sales to 70 percent? Make sure you have enough left over every day to cover all the bills and expenses, and if it will leave a shortfall, you shouldn’t take the funding.

Check your margins too: why would you borrow money at 40%, and use it to buy goods that give you a 25% margin? The margin doesn’t cover the borrowing cost.

Stacking--having more than one merchant cash advance--is a common trap. Each funder taps into sales in the same cash drawer, and the result is a cascade effect. If the first $1,000 payment was tough, imagine having to pay out another $500, and then another $500.

The reconciliation option lets you recalculate the holdback when your sales are low. However, some agreements use “shall,” which means the funder is required to lower your bill, and others use “may,” which means it is entirely in their hands. Examine the window for any written-request provision. You might have to ask for the adjustment in advance and in writing. You might also think paying early will save on funding costs. It rarely does. A performance guarantee triggers only if you breach the agreement. However, a full personal guarantee leaves you owing the balance.

If your bad-day figures won’t support the advance, you need to change your numbers. If your company has an intractable margin or collections problem, credit card advances won’t make that go away. The finance cost is too high to use as margin money.