Structure
A business loan is a debt: the business borrows principal and repays it with interest over a set term. An MCA is usually structured as a purchase of future receivables, with the provider collecting an agreed total over time. The legal treatment depends on the agreement and applicable law.
How cost is expressed
Loans are commonly priced with an interest rate or APR, which reflects cost over time. MCAs are commonly priced with a factor rate, which sets a fixed total payback regardless of how fast it is collected. A faster payback period can make the time-based cost of an MCA considerably higher than the factor rate suggests.
Payment schedule
Many loans have monthly payments. MCAs commonly collect daily or weekly, either as a fixed amount or as a share of receipts. Frequent payments affect day-to-day cash, so compare schedules against your real deposit timing.
Disclosures vary by state
Some states require commercial financing providers to give standardized cost disclosures before a deal is finalized. New York's commercial finance disclosure regulation covers sales-based financing and includes an estimated APR. California's commercial financing disclosure law also requires cost disclosures for covered offers. Whether these rules apply depends on the provider, the amount, and where the business is located.
Questions to ask either way
- How much will the business actually receive after fees?
- What is the total amount to be repaid, and over what expected period?
- How often are payments collected, and can they change?
- Is a personal guarantee or collateral required?
- What happens after a missed payment or on early payoff?