Merchant Cash Advance (BUSINESS BORROWING BASICS 2018)

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The material in this webinar is for informational purposes only. It should not be considered
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While Financial Poise is happy to make this PowerPoint freely available to all, the reader is
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MEET THE FACULTY
MODERATOR:
Jonathan Friedland Sugar Felsenthal Grais & Helsinger
PANELISTS:
Raffi Azadian Azadian Group
Dean Landis Entrepreneur Growth Capital
Patrick Siegfried Usury Law Blog
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ABOUT THIS WEBINAR
Financing through a merchant cash advance (MCA) is used mostly by companies that accepted
credit and debit cards for most of their sales, typically retailers and restaurants. The concept is this:
funder purchases a portion of the company’s future credit card receivables for a discounted lump
sum. The MCA funder receives the purchased credit card receivables as they are generated either
by taking a percentage of the company’s daily credit card proceeds or by debiting a certain amount
of funds from the company’s bank account. Depending on the risk profile of the company, it can be
a more expensive form of financing for a business compared to other types of financing.
This webinar explains the nuts and bolts of MCA financing, its pros, and its cons. It explores the
documentation that is necessary to enter into such an arrangement, including how to negotiate that
documentation.
This webinar is delivered in Plain English, understandable to you even if you do not have a
background in the subject. It brings you into an engaging, even sometimes humorous, conversation
designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone
webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it.
7

ABOUT THIS SERIES
Many companies, and most of any size, use borrowed funds as part of their capital structure. Depending on the
nature of the business, its size, time in business, whether it has adequate collateral, and other factors, a business has
myriad options when borrowing funds.
This webinar series provides a guided tour of the various borrowing options available to businesses, from both a
business and legal perspective. Major topics covered include asset-based lending, P/O Finance, Factoring,
Merchant Cash Advances, and Market Place Lending / Fintech. Learn the advantages and disadvantages of each,
tricks of the trade when negotiating these arrangements, and more!
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors,
business owners, and executives without much background in these areas, yet is also valuable to attorneys,
accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings
you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the
series is designed to be viewed independently of the other episodes, so that participants will enhance their
knowledge of this area whether they attend one, some, or all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
EPISODE #1 Understanding the Lending Landscape 1/17/2018
EPISODE #2 Asset-Based Lending 2/21/2018
EPISODE #3 Purchase Order Finance 3/21/2018
EPISODE #4 Factoring 4/18/2018
EPISODE #5 Merchant Cash Advances 5/23/2018
EPISODE #6 Market Place Lending / Fintech 6/20/2018
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EPISODE #5: Merchant Cash Advances

INTRODUCTION TO MERCHANT CASH
ADVANCE
a. Threshold Matter: Old School v. New School MCAs?
b. Once, the MCA industry was essentially credit card factoring
c. Thus, MCA financing was limited to companies that accepted credit
cards from customers (the use of the term “Merchant” is vestigial
evidence of this since credit card companies have long referred to those
who accept their credit cards as such)
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 11

ADVANCE (con’t)
d. Over time, MCA industry participants figured out that they could apply
the same discipline they applied to underwrite and police credit card
merchants, to other vendors who do not accept credit cards, esp. given
the ability to debit bank accounts via ACH
e. This PowerPoint focuses on “Old School” MCAs but the
conversation of the webinar addresses both the more traditional
form of MCA and newer trends in the industry

ADVANCE (con’t)
a. Merchant cash advance (“MCA”): form of short-term business
financing
b. Business owner (“merchant”) sells portion of future revenues
(historically was daily credit card sales) to MCA provider in exchange
for immediate cash
c. MCA provider provides lump sum of cash to business as advance
against % of business’s future sales
d. Payments back typically made on “fixed” amount basis or on
percentage of receipts basis

REPAYMENT
a. Repayments are not made by the merchant directly. Rather, upon
obtaining a cash advance, the merchant is required to instruct its
merchant processor (or bank) to route a specified percentage of sales
directly (or ACH cash on deposit) to the funder on a daily or weekly
basis
b. Obtaining repayment directly from the processor (or bank) reduces the
funder’s risk and enables them to provide approvals broadly, even to
business owners with weaker credit

WHO USES MCAs?
a. Historically small, new businesses (less than a year old), with high
volume of credit/debit transactions per month, including:
1. retailers
2. restaurants
3. bars
b. But debit ACHs long allowed for a far greater variety of merchants to
use MCA

MCAs v. THE DAILY DEBT LOAN
a. As the MCA industry grew, several funders recognized the need for a
short-term business loan that could accommodate a broader range of
industries, underwrite all forms of revenue, and provide borrowers with
the predictability of a fixed daily payment
b. A common name for this arrangement is the daily debit loan

MCAs v. THE DAILY DEBT LOAN (con’t)
a. Unlike an MCA in which the merchant makes a variable payment, a
Daily Debit Loan has fixed daily payments that are pulled from the
merchant’s bank account
b. Moreover, because they are underwritten on all revenues, rather than,
perhaps, only credit card sales, merchants often qualify for larger loan
amounts that can be repaid over longer time periods

MERCHANT CASH ADVANCE – SALE OR
LOAN?
a. MCAs characterized as sales–quid pro quo commercial transaction that involves a
buyer (funder) & seller (merchant)
b. MCA provider purchases percentage of receipts expected to be generated from
merchant’s future sales
c. Does not create lending relationship if terms of agreement are properly drafted
i. In some cases, MCA transactions may be recharacterized as loans (discussed
more later)
d. Merchant authorizes MCA provider to obtain a certain percentage of future daily
sales, or fixed daily amount to estimated to equal this % until MCA provider is
repaid

MCAs v. LOANS
a. Additional differences between MCAs & traditional bank loans:
i. MCA
▪ MCA provider focuses on history of merchant’s credit/debit card
transactions
▪ Merchant’s bank account acts as collateral
▪ Merchant’s owner not typically required to give MCA provider
personal guaranty
▪ no fixed maturity date

MCAs v. LOANS (con’t)
ii. Bank Loans
▪ Borrower usually required to have good credit
▪ Borrower’s owner must provide personal guaranty
▪ Borrower must grant security interest in all collateral
▪ Fixed maturity date

MCAs v. LOANS (con’t)
a. Regulations
i. MCAs subject to fewer state & federal lending regulations
ii. MCA providers also not generally subject to commercial usury laws

HOW EXPENSIVE IS A MERCHANT CASH
ADVANCE?
a. Merchant cash advances and daily debit loans are priced on a factor
rate.
b. The factor rate shows the dollar amount the merchant will repay over
the term of the loan for every dollar it borrows.

ADVANCE? AN EXAMPLE.
a. For example, a 1.32 factor rate means a merchant that borrows $10,000
will eventually repay $13,200. Payments are usually made daily – excluding
weekends and holidays – which means every month the merchant will
make between 20 and 22 payments.
i. Amount Borrowed x Factor Rate = Amount Repaid
b. The term of an MCA can typically vary from 60 days to 18 months. The
number of daily payments the borrower will make can be estimated by -
i. Term (in months) x 21 payments = Total Payments

ADVANCE? (con’t)
a. In general, there are three tiers of merchant cash advance:
b. While there are exceptions within each tier, the general rule-of-thumb is
that merchants with better credit will obtain larger loans with longer terms,
while those with lesser credit will obtain smaller advances with shorter
terms.
Source: ( https://www.dealstruck.com/resources/merchant-cash-advance-101/)

HISTORICAL MCA BENEFITS & DRAWBACKS
a. Benefits for Merchants
i. Quick access to cash–Merchant able to consummate transaction within
days without heavy or complex paperwork
ii. No personal guaranties & no security–MCAs unsecured, & Merchant
does not need to put up additional collateral or guaranty for MCA
iii. When sales are down, so are payments–under a “percentage of credit
card sales” repayment structure, a Merchant’s daily or weekly payment
is correlated with its sales.

HISTORICAL MCA BENEFITS &
DRAWBACKS (con’t)
a. Drawbacks for Merchants
i. High Costs – annual borrowing costs with all fees can range from
40% - 350%
ii. Costs vary depending on the size of the advance, extra fees, &
repayment time frame
iii. Costs are generally far more than a traditional business loan

DRAWBACKS (con’t)
a. Benefits for MCA Providers
i. Higher sales = higher fees
ii. Limited regulation – MCAs are regulated by the Uniform
Commercial Code (UCC) in each state, not the Truth in Lending
Act.
iii. No benefit to early repayment – repayment amount is fixed

DRAWBACKS (con’t)
a. Drawbacks for MCA Providers
i. Risk of recharacterization of MCA as loan
ii. Risk of sales downturn by merchants
iii. No guaranties or security to enforce terms of MCA
iv. MCA provider carries risk that receipts will not be generated by
merchant

EVOLVING MODEL
a. ACH MCAs and Daily Debit Loans now more common than credit
card MCAs
b. New model advances more money, provides longer terms, requires
better credit, provides capital to broader array of merchants
c. New model looks and feels more like other asset-based lenders than in
the past

TRADITIONAL MCA MECHANICS–
COMMON MCA AGREEMENT TERMS
a. Merchant & MCA funder provider enter into agreement containing
terms of transaction, including:
i. Amount to be advanced to merchant
ii. Payback amount (including fee)
iii. Holdbacks from merchant’s daily/weekly/monthly credit or debit
transactions
iv. Merchant agreement not to engage in fraud or any other practice
that would intentionally deny MCA provider its receivables

COMMON MCA AGREEMENT TERMS (con’t)
a. Holdback Terms
i. Depending on agreement between MCA funder & merchant,
each day an agreed upon percentage of the daily credit card
receipts are withheld to be paid to the MCA Funder
ii. This is called a “holdback.”

COMMON MCA AGREEMENT TERMS (con’t)
iii. The “holdback” percentage is based on –
• The amount of funds a business receives
• the length of repayment
• size of monthly sales
b. Merchant using MCA will typically pay back about 20-40% or
more of the amount borrowed- this is the Factor Rate

TRADITIONAL MCA MECHANICS–HOLDBACK
AMOUNT V. TOTAL REPAYMENT AMOUNT
a. Understand the difference between holdback amount (paid by merchant each
day/week (percentage of sales receipts) v. repayment amount for the entire
advance
b. i.e. holdback amount may be 15% of daily receipts, while total repayment amount
is 30%

TRADITIONAL MCA MECHANICS–EXAMPLE
a. MCA funder advances merchant $10,000
b. Merchant agrees to repay total of $13,000
i. Payback, or factor rate, is 30%
c. To repay, however, merchant agrees to have 15% of daily credit card
transactions withheld by MCA funder (the holdback) until the $13,000 is
repaid
i. If merchant averages $14,500 a month in credit card sales, approximately
$2,160 will be withheld each month & advance will be paid back in
roughly 6 months

MCA REPAYMENT STRUCTURES- TAKING
A STEP BACK
a. Terms governing advance amounts & repayment set up repayment by
merchant by 1 of 2 common means:
i. Percentage of Daily Sales
ii. Automated Clearing House (“ACH”) repayment

MCA MECHANICS - REPAYMENT
STRUCTURES– DAILY SALES
a. Percentage of Daily Credit Card/Debit Sales repayment structure
i. Less common today
ii. MCA funder repaid by a fixed percentage of merchant’s
daily/weekly/monthly credit or debit card sales
iii. Repayment timeframe varies due to fluctuation in a merchant’s
daily sales
iv. Most MCA agreements schedule repayment within 6-18 months

MCA MECHANICS- REPAYMENT
STRUCTURES– DAILY SALES (con’t)
Example:
i. Merchant & MCA funder agree to 10% payment of merchant’s
monthly sales in exchange for cash advance, and repayment total is
$70,000 (inclusive of Advance Costs)
ii. MCA funder deducts 10% of merchant’s monthly credit card sales
until repaid
iii. Merchant’s average monthly credit/debit sales are $100,000
iv. Merchant repays $10,000 monthly, (daily payments of $333 in a 30-
day month)
v. At this pace, merchant repays advance in 7 months

MCA MECHANICS- REPAYMENT
STRUCTURES– DAILY SALES (con’t)
a. Example (cont’d):
i. Twist: Merchant’s revenues from credit/debit transactions are only
$70,000 per month
a. Merchant now unable to repay until month 10 ($233 daily in 30-
day month)
b. Speed at which merchant repays MCA will also influence fees
charged

MCA MECHANICS—REPAYMENT
STRUCTURES–ACH
a. Automated Clearing House (ACH) Repayment Structure
i. More common
ii. Under fixed ACH repayment structure, MCA funder paid by remitting
fixed daily or weekly withdrawals from merchant’s bank account
iii. Withdrawal amount is fixed–merchant pays same amount regardless of
sales volume
b. Due to fixed payment structure and higher risk, ACH agreement may be
characterized as a loan

RISK OF MCA BEING RECHARACTERIZED
AS LOAN
a. Distinction between MCA & traditional loan may be unclear in some
circumstances
b. Whether an MCA is structured as loan or sale depends on the intention of
the parties –mere fact that a signed agreement states the transaction is a sale
is irrelevant in most states
c. To be characterized a purchase & sale transaction, the MCA provider must
assume more risk than the risk of non-payment
i. Generally, MCA provider must assume risk that merchant’s
business could slow down or possibly close – these are not risks
present in a traditional loan transaction

AS LOAN (con’t)
a. If MCA is recharacterized as loan, it raises issues for MCA provider
(i.e. potential applicability of usury laws, etc.)
b. Courts have addressed issues dealing with the sale & purchase of future
receivables as a loan or sale transaction

AS LOAN (con’t)
a. Platinum Rapid Funding Grp. v. VIP Limousine
▪ New York Supreme Court held “purchase of receivables is not a loan
& it’s not even close.”
▪ Court further elaborated that agreement at issue must be “considered
in totality & judged by its real character rather than what the parties
named [the transaction].”

AS LOAN (con’t)
Court focused on several key distinctions such as:
▪ whether Merchant agreed to “repay” the “loan”
▪ Future receivables purchased were sole source of repayment under
MCA agreement
▪ Personal guaranty would not give rise to transaction being
characterized as a loan so long as personal guaranty was no
broader than the Merchant’s obligations under the agreement
b. Champion Auto Sales, LLC c. Pearl Beta Funding, LLC- affirmed trial
court decision that fixed ACH transaction is not a loan

JONATHAN FRIEDLAND
jfriedland@sfgh.com
Jonathan Friedland is a Partner with Sugar Felsenthal Grais & Helsinger, LLP, with offices in Chicago and New York. Jonathan regularly
advises private funds in their M&A activity and private companies in their day-to-day affairs. Jonathan has extensive experience in guiding
companies and their boards through a variety of challenging situations, including in Chapter 11 and other insolvency regimes.
Jonathan graduated from the SUNY Albany, magna cum laude, in 1991 (after three years of study) and from the University of
Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct Professor of
Strategic Management at the University of Chicago’s Graduate School of Business for several years and was the 2006 Clayton Center for
Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan has been profiled,
interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside
Counsel; LAW360; BusinessWeek.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions;
Dow Jones LBO Wire; and The Daily Deal. Jonathan is also lead author and editor of several significant treatises, several chapters in
other treatises, and hundreds of articles on law and business. Jonathan holds the highest possible rating from Martindale-Hubbell (AV®
Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in multiple areas of practice, including
Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, has been named several times as a “Leading Lawyer” by Leading
Lawyers Magazine, and has received several other similar distinctions. He is also the founder of DailyDAC/Financial Poise.

RAFFI AZADIAN
raffi@azadiangroup.com
Raffi Azadian is the CEO of Azadian Group LLC, a financial services firm which he
founded in 2003. Azadian Group provides creative capital solutions to small and
medium-sized businesses in various industries. Prior to founding Azadian Group, Raffi
spent over 13 years in technology and venture capital. He spent 2 years as N. American
Director of a software division of Siemens AG, and was an investor, founder, or early
member of a number of successful, venture-backed start-ups, primarily focused on
enterprise software and services. Specialties: equity and debt financing, asset-based
lending, small business funding, commercial credit, M&A, equipment financing,
equipment leasing, purchase order financing, accounts receivable financing, factoring,
inventory financing, deal origination, business development, due diligence/advisory
services, market research.

DEAN LANDIS
DLandis@egcap.com
Dean represents the third generation of his family to own and manage a finance company.
Dean has worked closely with hundreds of companies to provide working capital and other
services. Dean joined his family business, United Credit Corp., in 1991 and started its invoice
discounting division known as Patriot Funding. Dean sold United to Finova Capital in 1998
and led its Growth Finance Division. Two years later, Dean re-purchased the Company and
renamed it Entrepreneur Growth Capital. Dean is also the Founder and CEO of Credit Cash
LLC, a fast growing merchant advance company. Prior to entering commercial finance, Dean
was an associate at Bear Stearns & Company and an analyst at Merrill Lynch Capital Markets.
Dean received his MBA from Northwestern’s Kellogg Graduate School of Management and
his BA from Duke University. Dean serves on the Board of Trustees of the Allen Stevenson
School and of the Randall’s Island Sports Foundation.

PATRICK SIEGFRIED
psiegfried@usurylawblog.com
Patrick Siegfried is the author of the Usury Law Blog. Patrick is a practicing attorney
in Bethesda, Maryland. Patrick’s work focuses on issues regarding alternative small
business financing. He lives with his wife, son, daughter and two dogs in Silver Spring,
Maryland.

The material in this presentation is for general educational purposes only. It has been
prepared primarily for attorneys and accountants for use in the pursuit of their
continuing legal education and continuing professional education.
While Financial Poise is happy to make this PowerPoint freely available to all, the
reader is cautioned that it was created for use as part of a webinar that featured an
extensive verbal discussion of the topics addressed in the PowerPoint. It was not
designed to be read by itself. Financial Poise webinars can be purchased
at www.financialpoise.com You may also receive offers for free webinars by
subscribing to Financial Poise's DACyak, a free weekly newsletter.
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DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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