Merchant cash advance

How does a merchant cash advance work for a trucking business?

The name comes from businesses that take card payments, but most trucking operations don't get paid by card. Freight money arrives as ACH or check deposits from brokers, shippers, or a factoring company. So in trucking, an MCA provider usually looks at your business bank deposits instead of card sales.

Here is the usual shape of the deal:

1. The provider reviews your deposits. Most ask for several months of business bank statements to see how much comes in and how steady it is.
2. You get a lump sum. The provider "buys" a set dollar amount of your future receipts (often called the purchased amount) and pays you a smaller amount up front.
3. The provider collects a share of what comes in. This is the holdback, or specified percentage. In practice most agreements set a fixed daily or weekly debit that is meant to approximate that percentage, pulled by ACH from the account your freight money lands in.
4. It ends when the purchased amount is delivered. There is usually no interest rate and no fixed end date. The faster the money comes in, the sooner it's paid.

Because an MCA is generally structured as a purchase of future receivables and not as a loan, lending rules such as interest-rate limits may not apply to it in the same way. Whether a particular agreement is treated as a purchase or as a loan can depend on its terms and on state law.

What's different from factoring. Factoring is the sale of specific invoices you've already earned: a load is delivered, you sell that invoice, and the factoring company collects from the broker or shipper. An MCA is tied to future deposits in general, not to a particular delivered load, and the provider collects from your bank account, not from your customer. See factoring and accounts receivable financing.

What can an MCA be used for, and how is it typically structured?

MCA money is usually unrestricted. Operators use it for the things that can't wait for a broker to pay: a major repair that has a truck parked, a down payment on insurance, a fuel run before the first invoices clear, payroll in a slow week.

Typical structure points to look for in any offer:

• Funded amount vs. purchased amount. The cash you receive, and the larger total the provider is entitled to collect.
• Factor rate. The purchased amount divided by the funded amount (in the hypothetical below, $54,000 divided by $40,000, or 1.35). It is not an interest rate.
• Holdback or specified percentage. The share of receipts the provider is buying.
• Remittance. A fixed daily or weekly ACH debit, or a true percentage of actual deposits.
• Fees. Origination, underwriting, ACH, or other fees that may be taken out of the funded amount, so you receive less than the headline figure.
• Reconciliation. Whether, and how, you can ask the provider to adjust the debit to match what you actually took in.

MCAs are generally a short-term tool. They are not usually how operators buy a truck or trailer; for that, see equipment financing.

What affects the cost of an MCA, and who can get one?

Factor rate is not APR. A factor rate tells you the total you'll pay back, but not how fast. The same factor rate costs much more on an annual basis when it is collected over a few months than when it is collected over a year.

Hypothetical illustration only. These are not offers, typical terms, or rates from BreadRoute or any provider. Say a business receives $40,000 and agrees to deliver $54,000 (a 1.35 factor rate). The cost is $14,000 either way.

• If it's collected by daily debits over about six months of business days, that's roughly $429 a day, and the annualized cost works out to roughly 125%.
• If the same $54,000 is collected over about twelve months, that's roughly $214 a day, and the annualized cost works out to roughly 63%.

Same factor rate, very different annual cost. That's why some states now require providers to show an estimated annual percentage rate next to the factor rate (see below). (These figures are a simple annualized rate based on 252 business days a year, not a regulatory APR calculation.)

What usually moves the price and the decision:

• Deposit volume and consistency. Steady monthly deposits matter more to most MCA providers than credit score alone.
• Time in business. Many providers want to see some operating history; new-authority carriers may have fewer options.
• Existing advances. Taking a second or third MCA while the first is still being paid is called stacking. Each one adds a debit against the same deposits, and the combined daily pull can outrun what the business takes in.
• Factoring arrangements. If your invoices are already sold to a factoring company, that company may have a lien on receivables, and an MCA provider may also file a lien. Check what you've already signed before adding another claim on the same money.
• Personal guarantee and liens. Many agreements include a personal guarantee or a performance guarantee from the owner and a UCC lien on business assets. Read exactly what is guaranteed.

State disclosure and registration laws. Several states now require providers of sales-based financing (which includes most MCAs) to give standard cost disclosures, including an estimated annual percentage rate, when they make a specific offer. California's rules took effect December 9, 2022. New York's Commercial Finance Disclosure Law covers offers up to $2.5 million and its regulation was adopted in 2023. Utah, Virginia, Connecticut, and Texas have enacted registration and disclosure laws as well. Other states may have their own rules, so check with your state's financial regulator. Thresholds, dates, and what must be disclosed vary by state, and some laws exempt certain providers. If you're offered an MCA, ask for the disclosure your state requires, and ask for the total repayment amount in dollars either way.

Confessions of judgment. Some MCA agreements have included a confession of judgment, a clause where the business owner agrees in advance that the provider can get a court judgment without a lawsuit if the provider says the business defaulted. New York amended its law in 2019 so these can no longer be filed there against businesses and people who don't reside in New York. Virginia law makes confession of judgment provisions in sales-based financing contracts unenforceable. If an agreement has one, understand it fully before you sign, and consider having an attorney read it.

Who in trucking and logistics typically uses an MCA?

• New authority: Some new carriers look at MCAs because they hear "no" from banks. Thin deposit history can limit options or raise the cost. It's worth checking factoring first, since it is based on loads you've already delivered.
• Small fleets: Used for a short-term gap, such as a big repair across two units or a slow month. Stacking risk climbs as the number of trucks and bills grows.
• Couriers: Courier and final-mile operators with frequent, smaller deposits sometimes fit the daily-deposit model. A daily debit on a thin margin can squeeze quickly.
• OTR and local haul: Long broker pay cycles create gaps; MCA debits hit every business day whether a load paid or not.
• Brokers and dispatchers: Brokers who pay carriers before shippers pay them carry a cash gap. An MCA can cover it short term, but a broker's own receivables may support accounts receivable financing or a line of credit.
• Towing and repair: Shops and towers that take card payments are closer to the classic MCA model. Slow motor-club or insurer payments can make a fixed daily debit hard to keep up with.