The MCA ACH Loan Rule of Thumb is a general guideline used in the context of Merchant Cash Advances (MCA), particularly those that are repaid through Automated Clearing House (ACH) withdrawals. These loans are a form of short-term financing where a business receives a lump sum of money upfront and repays it through a percentage of daily or weekly sales, or through fixed ACH debits from their bank account.

Key Aspects of MCA ACH Loans and the Rule of Thumb:

1. Repayment Structure:
   • In an MCA ACH loan, the lender deducts a fixed amount (or a percentage of sales) from the borrower’s bank account on a regular basis (daily, weekly, or monthly) via ACH transactions. This ensures that repayments are automatic and consistent.
2. Advance Amount and Repayment:
   • The amount advanced is typically based on the business’s projected future sales, with repayments structured to ensure the lender recovers the loan plus fees over time. The total repayment amount includes the principal plus a factor rate (a multiple, usually between 1.2 and 1.5), rather than a traditional interest rate.
3. Rule of Thumb:
   • Revenue-Based Qualification: A common rule of thumb is that the loan amount (or advance) should not exceed a certain percentage of the business’s monthly revenue. For instance, an MCA provider might advance an amount equivalent to 50% to 100% of the business’s average monthly revenue. This ensures that the business can manage repayments without severely impacting cash flow.
   • Daily Repayment Ratio: Another rule of thumb might involve the daily repayment amount not exceeding a certain percentage of the business’s daily revenue, typically around 10% to 20%. This helps to prevent the repayment from overwhelming the business’s cash flow.
   • Duration: MCAs are usually short-term, often ranging from 3 to 18 months. The repayment terms should be structured so that the business can repay the advance within this timeframe, typically through small, manageable daily or weekly payments.
4. Risk Management:
   • Revenue Stability: The rule of thumb also implies that MCAs are best suited for businesses with stable and predictable cash flows. A business with fluctuating revenue might struggle with fixed ACH repayments, leading to cash flow issues.
   • Renewal Considerations: Many businesses that use MCA financing do so repeatedly. A rule of thumb here would be to ensure that each new advance doesn’t lead to an unsustainable cycle of debt, where the business is continually borrowing to repay previous advances.
5. Factor Rate Understanding:
   • Borrowers should understand that the factor rate applied to the advance is not an interest rate. A factor rate of 1.4 on a $10,000 advance means the business will repay $14,000, regardless of the repayment term. The shorter the repayment term, the higher the effective cost of capital.

Practical Application:

• Example: If a business has an average monthly revenue of $50,000, using the rule of thumb, it might qualify for an MCA of up to $25,000 to $50,000. If repaid daily, with a 10% daily repayment ratio, the business would repay $250 to $500 per day, depending on the terms.

Considerations:

• High Cost: MCA loans are typically more expensive than traditional financing, so the rule of thumb helps ensure that the business can afford the repayment without harming its operations.
• Cash Flow Management: Businesses should carefully consider their cash flow and ensure that the daily or weekly ACH deductions won’t disrupt their ability to cover other operational expenses.
• Use Case: MCAs are generally used for short-term working capital needs, such as managing seasonal fluctuations, purchasing inventory, or covering unexpected expenses.

The MCA ACH Loan Rule of Thumb helps businesses gauge the suitability of an MCA based on their revenue and cash flow, ensuring that the loan is manageable and does not lead to financial strain.