Financial Guides

Understanding How an MCA Affects Business Cash Flow’

Working capital is the lifeblood of a small business and without cash on hand a business will be hard pressed to operate. So, when a business takes on a heavy debt servicing program like an MCA, the business’ cash flow could be stifled. This debt servicing requirement is significantly increased if the business takes on more than one MCA.

To understand debt servicing and how this affects the cash flow of the business, here is an example:

The business generates $80,000 on average per month in gross sales. Here is the breakdown of the 4 cash advances they are currently paying:

- Total Outstanding Balances: $96,638

- Total Cumulative Daily Payment: $1,204

- Total Cumulative Monthly to MCA debt: $24,080

This means that the business is paying 30% of their total gross sales to pay MCA debt. For most businesses this high debt servicing could prove unsustainable for an extended period of time. From what we have seen working with clients that have multiple cash advance positions is that they were forced to borrow more than one cash advance because they were experiencing cash flow issues from the initial mca debt servicing.

This is why it's important to use proceeds from a cash advance to directly increase business income. This is easier said than done, since things in business don’t always go as planned. If money from an MCA can be used to generate more revenues for the business, this will lower the relative debt service. 

When the debt service is too high for MCA payments, businesses apply with With a Reverse Consolidation, we can lower the debt servicing by extending the terms of your MCA commitments. For the above example, we were able to lower the total monthly outlay for cash advance payments from $24,080 to $11,000, which is a 50% reduction in debt servicing.  This way the business is paying less than 15% of gross in servicing debt, which is below their operating margins.

If you have more than one cash advance, we urge you to apply to see how a reverse consolidation can save your business.

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