Simple calculation to determine if your business can afford any cash advance.
See the 3 month average and 20% example below.
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How to figure out what your business can pay.
- Find the lowest deposit month of your last 3 months business checking account deposit totals. Example, $50,000.
- Take that figure and multiply it times .20. This is approximately the amount you should conservatively be taking for an mca merchant cash advance.
- Contact mca companies and apply. If you are approved for more than your recommended safe amount, do not take more unless you are sure you can make the payments.
- Close the cash advance and funds are deposited into your account.
How to calculate the amount
Below is an example of how to estimate a conservative funding amount.
- Look at your most recent (3) months business checking account statements. Find and add the amount of your total deposits. Most banks give you one amount and list it as “total deposits”. Some banks will also have a separate entry for electronic deposits. If your bank itemizes different deposit types, add them up. Example figures are below.
December total Deposits $25,000
January total Deposits = $15,000
February total deposits = $19,000
- The lowest month is January at $15,000 in total deposits. Multiply $15,000 X .2 = $3,000. $3,000 is a safe and conservative amount.
- A more aggressive amount is $15,000 times .5 = $7,500.
- Figure out your daily payment. On average, the term of an mca merchant cash advance is approximately 6 months. For $3,000, your daily payment will be approximately $3,000 X 1.35 % (6 x 21) = $155.77 per business day. There are approximately 21 business days per month. The rate factor used here is 1.35.
- If you can handle this payment for 6 months, you can close the transaction.
Other factors that affect offer and approval amounts:
Depending upon other factors such as time in business, average daily balances and amount of revenues, the funder may offer a much larger business loan or advance. Your business may be able to handle a larger amount. The purpose here is to determine what is a conservative and safe amount.
More net income with higher deposits
Businesses with higher gross deposits can often afford a higher advance. This is because the same percentage of disposable income equals a higher dollar amount. If your business has fixed total expenses of $7,500 out of $10,000, then it has disposable income of $2,500.
When gross deposits are $100,000 and fixed expenses are $75,000, then disposable income is $25,000.
In the later case, a business will be able to handle a larger merchant cash advance, because their total gross deposits are higher.
Many businesses continue to take out merchant cash advances by renewing them once they are paid off. If your business is taking out a merchant cash advance for the first time, try a lower amount first to make sure your business has the cash flow needed and can handle it. If so, you can take out a larger amount on a second advance.
FAQ, Frequently asked questions: Can my business afford an mca merchant cash advance?
How can I get an mca cash advance safe for my business with a payment I can handle?
Use the formula above to figure out how much of a daily payment your business can afford. Also consider if the amount per week and month fits into your business’s budget. Multiply the daily payment times 5 for the weekly total and times 21 for the monthly total. Daily mca cash advance payments should not be more than 20% of total business deposits.
Can I lower the daily payment when my business has a slow month?
Take the average monthly sales of your 3 lowest months per year. The cash advance approval you accept and close should be 20% max of that 3 month average and that will be affordable for your business during slow months.
How can we figure out if we can repay a merchant advance for our seasonal business?
Look at last years sales during the same months you would be repaying a new cash advance now. Take the average monthly sales during those same months last year and multiply it times .20, which equals 20%. That is the affordable approval amount a seasonal business can pay.