The Hidden Cost of Refinancing Merchant Cash Advances

You might not think to refinance a merchant cash advance (MCA), but it might just happen to you if you are carrying a balance from an advance and decide to take out another. If you are considering or will ever consider taking out a MCA, this article is a must read!

When dealing with non-traditional financing options, it’s really important to understand what you’re giving and what you’re getting. This is especially true when it comes to taking out a second advance or loan from some of these alternative finance options. We’ve seen Merchant Cash Advance (MCA) and Cash Flow Loan providers follow a weird practice that results in deeply hidden fees charged to the business owner.

First we’ll talk about this practice with MCAs

Like loans, with MCAs you get a set amount of cash up front, called the advance. But instead of getting charged an interest rate, you agree to pay back the advance amount plus a good chunk more, e.g. – 1.25 times (125% of) the advance amount (the multiple varies, but it’s typically 1.2-1.5X). Instead of regular fixed payments, you pay back your advance by agreeing to pay a fixed percent of your future credit/debit card sales. This continues until you’ve paid off the balance owed. Assuming you have consistent monthly card sales, it typically takes 3-9 months to pay off your balance.

An MCA example

You get a $30,000 advance and agree to pay it back with a 1.33 multiple ($30,000 × 1.33 = $39,900). The way that you pay it back is that 15% of your credit/debit card sales will go to the MCA provider. So if your monthly card sales are $45,000, you pay $6,750 each month until you’ve paid back the owed amount, $39,900. In this case it would take about 6 months to pay back what you owe.

MCA example

Advance amount: $30,000
Multiple: 1.33
(Projected) avg monthly card sales: $45,000
% of card sales going toward repayment: 15%

Owed balance
= Advance amount × Multiple
= $30,000 × 1.33
= $39,900

Average monthly payments
= Avg monthly card sales × % of card sales going toward repayment
= $45,000 × 15%
= $6,750

Estimated time to pay
= Owed balance / Monthly payment
= $39,900 / $6,750 
= about 6 months
=> 123% APR

The APR for this comes out to 123%. That’s steep. And once you’ve taken out the advance, you’re typically locked in to pay that interest rate, even if you pay down the loan in advance. In this case, it wouldn’t matter if you paid the advance back in 3 months or 9 months, you’d have to pay back the full $39,900.

Unexpected Refinancing When Taking Out 2nd MCA

Now suppose that for your first month your card sales were a little below average, and you repaid $5,900. Not a problem. Your remaining balance owed is $39,900 – $5,900 = $34,000. However, now your business needs $15,000 more in working capital so you decide to take out another advance.

The advance provider tells you because of good repayment history they’ll give you a lower rate this time of 1.25. That sounds great and you’d think this would be the same process as before, which means you would owe an additional $15,000 × 1.25 = $18,750, for a grand total of $34,000 + $18,750 = $52,750 owed

Scenario 1 - What you expected

Amount owed on 1st MCA: $34,000
New advance requested: $15,000
New advance multiple: 1.25

Expected amount owed on 2nd MCA
= New advance requested × New advance multiple
= $15,000 × 1.25
= $18,750

Expected total amount owed
= Amount owed on 1st MCA + Expected amount owed on 2nd MCA
= $34,000 + $18,750
= $52,750

You would not think that it has anything to do with your existing advance. That is what we and most others would expect. And we would all be wrong. Instead, your MCA provider will include a refinance of your existing advance in the new advance they provide you. And it will cost you.

What actually happens is that the MCA refinances your original advance using this 2nd advance. In addition to the $15,000 you requested, the MCA also advances you $34,000, which is instantly used to pay off the $34,000 you owe on the 1st MCA. So you actually owe $49,000 × 1.25 multiple = $61,250

Scenario 2 - What actually happens

Amount owed on 1st MCA: $34,000
New advance requested: $15,000
Additional advance amount to pay off 1st MCA: $34,000
New advance multiple: 1.25

New advance amount
= Advance amount to pay off 1st MCA + New advance requested
= $34,000 + $15,000
= $49,000

Actual amount owed on 2nd MCA
= $49,000 × 1.25
= $61,250

Actual total amount owed
= Amount owed on 1st MCA + Actual amount owed on 2nd MCA
= $0 + $61,250
= $61,250

The difference between expected and actual amount owed after taking out the 2nd MCA is $61,250 – $52,750 = $8,500.

And your effective multiple for both advances is actually $67,150 / $45,000 = $1.49.

Calculating your new actual multiple

1st advance: $30,000
Cash from 2nd advance: $15,000
Amount paid back $5,900
New amount owed: $61,250

Total amount advanced
= 1st advance  + Cash from 2nd advance
= $30,000 + $15,000
= $45,000

Total amount to pay back (to the MCA)
= Amount paid back + New amount owed
= $5,900 + $61,250
= $67,150

The Actual Multiple you are paying on your advances
= Total amount to pay back / Total amount advanced
= $67,150 / $45,000
= 1.49

Wait what? How did this merchant end up paying a 1.49 multiple when the advertised multiples were 1.33 and 1.25?

Getting hit with a "Double Fee"

The $34,000 owed for the 1st advance is a portion of your original advance: $25,564 of the $30,000 you were advanced (the rest was paid off with your $5,900 payment after the first month).

The twist here is that you get charged a multiple on the $25,564 amount twice. $25,564 1.33 = $34,000. Then you $34,000 is included in the new advance: ($34,000 + $15,000) 1.25 = $61,250.

Double Fee explained

Working backwards:



Total after 2nd advance

= $61,250

= ($34,000 + $15,000) × 1.25

= (balance owed from 1st advance + new advance amount) × multiple for 2nd advance

= [($25,564 × 1.33) + $15,000] × 1.25

The 1st advance had a multiple of 1.33, which means the amount we were advanced was $25,564. Remember, our original advance was $30,000 but we paid off $5,900 after the first month. So $25,564 represents the portion of the original $30,000 we were advanced that’s still in play after one month. Rearranging the math:
= [($25,564 × 1.33) × 1.25] + [$15,000 × 1.25]

Here you can see that the $25,564 (from the original $30,000) you were advanced in the beginning has since been charged twice. It was first multiple by 1.33 to get $34,000, then again by 1.25. Here we’ve uncovered the hidden double fee.

This double fee makes your overall multiple balloon to 1.49.

The math here is very unintuitive. But this practice is fairly common. As we mentioned in the beginning of this article, this practice happens with MCAs and Cash Flow Loan providers. Below is a real example of a cash flow loan (OnDeck Capital) customer that got caught up in this situation without having any idea what was going on.

Here is the complaint via the Better Business Bureau(View Here), edited for clarity:

“I applied for a cash advance loan through my business merchant account. They approved it for $25,000. With interest and fees, the total loan came out to $32,579. Marty Flower, their associate, told me that my daily payment would be $198.76 a day until $32,579 is paid off. After about 3 months, my balance was $15,332 when I asked Marty for a second loan. He approved it for $20,000 and told me I would receive it in my account in a few days.

A few days later, I checked my account and only $4,783.86 came in from OnDeck Capital, and my old loan balance was $0.00. Now I am thinking to myself, ‘What is going on?’ Maybe Marty made a mistake or something. I should’ve had $20,000 in my account. Then I couldn’t get in touch with Marty for a week. He calls me after 1 week saying that my first loan balance was paid off with my second loan, and my new balance is now $22,354 and I got so upset and told him to put it back the way it was. I am not paying them another $7,000 to make use of $4,783.86 — that’s insane. Marty never explained anything about paying off the first loan balance with new loan.”

*The borrower wrote “$32.354” but we believe the above figure is the correct amount

It’s a similar "double fee" situation where the borrower’s balance of $15,332 was charged against twice. In OnDeck’s response, it said blatantly:

“it is our standard protocol to rollover any outstanding amounts owed into the new renewal loan taken. In this case, *** **** still owed $14,665.33 from his first loan, which was taken out of his renewal amount of $20,000. However, it appears *** **** felt this aspect of our small business loans was not properly explained by his Funding Advisor Partner and attempts to reach out to Martin Flowers went unreturned. According to our records, our Operations Department spoke directly with *** **** on January **, 2013 about the matter. We offered to return the renewal amount and offered a workout or payment plan to return the balance still owed on his first loan….”

Basically, the double fee is standard protocol for merchant cash advance and cash flow loan providers. When business owners sign the refinance offer, they are committed to paying double fees.

In their world, loans don’t amortize like bank loans or LendingClub / Dealstruck loans do. This is something small business owners absolutely need to pay attention to. The next time you are in a situation to refinance a non-bank loan or merchant cash advance, please re-read this post.

Try our merchant cash advance calculator for yourself:

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This article was originally written on May 29, 2014 and updated on November 1, 2016.

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