The MCA Renewal Pitch: 5 Questions Before Accepting More Funding

When an MCA funder calls with a renewal offer halfway through paying back the advance, do not assume that is the best way to get more funds. Look at how much cash actually lands, how far you have paid back the advance, what the money can do for the business, whether the rate is the best you can find, and whether you can get a cheaper way to settle up the outstanding balance.

Net New Money

A renewal on a merchant cash advance feels like a customer credit card, but it does not work that way. The advance company pays the MCA balance, then puts your business back on the hook for the whole balance of the renewal. Let us say you got a $60,000 advance. At this point, you have paid back $38,000 of it, and have a $22,000 balance. Now the advance company calls with an offer to extend you a $75,000 advance. Let us say the cost is 1.33, which has you paying back the company $99,750. You think you are getting $75,000 to spend. Instead, $22,000 of it pays down the first loan, so you get $53,000 net.

You have to be careful to note that the 1.33 applies to the whole thing. You are paying back $99,750, but you only get $53,000 as net new money. The ratio of $99,750 divided by $53,000 gives an effective cost of 1.88 on the new money. Although a renewal is a tempting way to get money, it often is the most expensive advance because it bundles the money left on a current loan to the value of the renewal. In California, the renewal offer has to lay out how much you will receive after any payoffs. That way you can shop it for a better deal.

Offers usually come once a business has paid back around 40-50% of the advance. That happens 3-5 months into the deal for most borrowers. A few advance companies offer renewals to businesses that have paid back as little as 30% of the advance. These companies leave businesses with much less net new money. Later renewal means a smaller old balance, which lets you get more new cash. If your company gets a renewal offer early in a deal, do not think the offer shows how favored your business is by the funder.

The Expected Value of the Return

Ask yourself what will the money do for the business. Think about the expected returns, subtract the total cost, then decide if they are worth it. Return clearly beats the cost when the move will win $200,000 of gross profit yearly from a $50,000 investment. If you are covering a shortfall to meet payroll, keep the lights on, or any other sunk operating expense, the advance probably does not buy growth. It buys temporary survival.

A renewal can make sense with an urgent, time-sensitive need if the remaining balance is small. It buys a quicker response than applying for a term loan.

The Best, Cheapest Funding Possible

Good payment history may earn you a lower factor rate. Some funders cut 0.05 to 0.15. That sounds tiny, until you work the math. If the rate is no better, that tells you that you have leverage to ask the funder to do better, or shop other funders to see if they can. New York state dictates that the business has to get a statement showing what the APR equals.

The company who gave you the first MCA would like to keep you as a customer. Get competing quotes, then make it beat them all. Hardball enough, and you may get a better rate yet. And no MCA agreement says that a business owes the original funder more if it goes to a different funder for renewal. Also ask about lowering your holdback ratio to free up more daily cash.

You may qualify for a cheaper loan once you have survived a couple of MCA cycles, depending on your business’ revenues and credit. Businesses that make it 12 months or so on one or two MCAs have many more borrowing options, including installment loans that cost 20-35% APR, and that can buy out the remaining balance of the MCA. If the funds are for a critical but not a time sensitive expense, go the extra days to apply for a term loan. They are slower than a renewal, but take 2-7 days. Apply before the MCA is done, once it is over 60% repaid. Some lenders approve on condition the MCA is paid off at closing.

To boost your credit profile to get more financing options, open a business credit card if you have none. Open a checking account at a second bank.

Take a break, at least 60 days, after paying off your last MCA so that you have a month or two of bank statements without any ACH debit for a funding company. Statements showing 60 days of no MCA payment look great to lenders. Use that window to apply for a line of credit, which is cheaper, more flexible, and revolving.

No lender, including your current funder, has a veto over your business’ right to get the best, cheapest funding possible. Run these checks before you sign an offer for more cash:

• how much actual new money will you get?
• What are you going to do with it?
• Is the cost worth the return?
• Can you get a better deal?
• And is there an easier way to pay off the remainder of what you owe?

Do not take the first offer.