What are the hidden costs in MCA

A lot of business owners in the UK tend to not seek financial solutions because there’s a common misconception about the association of additional fees with such financial solutions. Nobody likes to hear about surprise costs after signing a contract with an MCA lender. That’s why instead of giving up on the idea altogether, we should get educated on these hidden costs: what they are, and how to know about them beforehand so they are not so “hidden” anymore.

What is Merchant Cash Advance (MCA)

Merchant Cash advance is a type of financing solution for all types and sizes of businesses in the UK. With MCA, a business can attain urgent funds to improve their cash flow in exchange for selling their future card sales. The amount of money is decided after an analysis of a business’s card sales as MCA is only based on non-cash sales. Cash revenue generated by a business doesn’t get counted.

How do MCA lenders earn profit?

MCA lenders charge a specific fee for lending cash. This fee is called a factor rate. It is decided before signing up an MCA contract.

What is the factor rate?

Factor rate tells you how many pennies to pay for every pound of the advance taken. 

For example, a Factor Rate of 1.5 means that you have to return £1.5 for every £1 you took as an advance. A factor rate is determined according to the volume of card transactions, business profitability, and credit rating of your business. If your business has a large traffic of card sales, the factor rate might be less. At the crux, it measures the stake that the MCA lender is associated with your business.

6 Hidden costs associated with MCA

Apart from the obvious factor rate, there might be some other costs associated with Merchant Cash Advance. It is best to get yourself acquainted with them before you find out about them after signing your MCA contract.

Origination cost

The origination fee is one of the most common types of costs associated with MCA. The origination cost is charged in either of the two following ways :

• A fixed percentage of the total MCA advance
• A fixed percentage is charged with every card transaction. 

Underwriting cost

Underwriting cost is the cost charged for the time and money spent to analyse the risk associated with your business. This risk is a reflection of your business credit rating, which then further decides the factor rate in addition to other factors.

Administrative cost

The administrative fee is related to the documentation and processing of the MCA application. Some lenders might also call it processing or service fees. Just like the origination fee, it is also calculated as a fixed percentage of the advance provided at the start.

Late repayment fee

If a business misses a repayment period, it can be charged a penalty according to the terms of their specific lender. Some MCA lenders have a grace period after the repayment deadline to provide flexibility to their customers. Since the total repayment period is specific to each lender and business, the deadlines, repayment schedules and grace periods vary everytime.

Scheduled repayments

Scheduled repayments are an important clause in the MCA contract. Other than the late repayment fee, a business will bear a penalty if it prepays the repayments before the decided schedule.

Contract renewal cost

After an MCA agreement expires, a contract renewal cost is charged to extend or renew the contract. Its important to decide your repayment time period before you sign the contract to avoid any inconvenience later. 

Why are these costs tend to be “hidden”?

These costs tend to be “hidden” because they are written in fine print or wrapped in industrial jargon that businesses tend to overlook. This also tells the importance of reading your contract terms attentively and make sure you understand everything. In case of confusion, ask from your MCA lender, or get help from internet resources.

How to avoid surprise MCA costs 

Read your contract carefully

Make sure you read and understand the details of your agreement carefully.

Compare lenders

Do your market research before selecting an MCA lender. This not only gives you a way to compare factor rates but also gives you an idea about how a reputable MCA lender should be. Go through previous client testimonies and reviews to know how your potential MCA lender treats its customers.. Another helpful tip is to work with an MCA lender who is an expert in your business industry. ComparedBusiness helps you secure merchant cash advance from the top lenders in the UK as per your business needs..

Deal with transparent lenders

After doing your research, go with a reputable lender who is also transparent about their fees. There might be instances where you find MCA lenders who provide you with lower factor rates but are not upfront about their hidden costs. Working with such lenders could be more expensive for you in the long run. Weigh your options and decide accordingly.