Finance
April 19, 2024

Traditional Ecommerce Merchant Cash Advance (MCA) Versus Clearco’s Invoice Funding

Author
Gurman Sihota

As the pioneer of non-dilutive funding for Direct-to-Consumer (DTC) ecommerce businesses, we’ve made conscious decisions to evolve Clearco’s product over time to better serve our customers. In a world where profitability and cash flow management are crucial, ecommerce businesses should want funding that provides flexibility and predictability for capital planning.

While Clearco and its peers have historically provided funding with payment amounts calculated as a percentage of daily revenues, Clearco’s Invoice Funding offering emulates a “fixed” weekly payment for businesses while still offering the benefits of a traditional ecommerce Merchant Cash Advance (MCA).

What is a Merchant Cash Advance (MCA)?

Traditional MCAs or similar types of revenue-based financing (RBF) products typically fund customers with “cash-in-bank” advances and begin collecting payments immediately as a percentage of daily revenues, known as a remittance rate. Traditional MCAs thus recover their investment by debiting customers daily or weekly until the total funded amount is paid. This means that customers are given the full funding in cash on Day 1, whether they need to immediately use that cash or not. In addition, those customers begin making payments on the  advance immediately, on a daily basis, in unpredictable amounts given the payment reflects a percentage of revenues which fluctuate every day.

Despite the drawbacks, businesses appreciated the traditional MCA structure, as it did not contain the same collateral requirements and covenants that come with other non-dilutive funding sources. Additionally, tieing payments to revenue meant businesses did not have to worry about weak sales periods creating cash flow challenges. If revenues declined, so did the daily amounts the MCA provider debited.

Why does a traditional MCA not work well for high-growth ecommerce businesses?

While the traditional MCA structure can still be effective growth capital for businesses, the evolution of the ecommerce market and business’ needs and challenges highlight key disadvantages of the product.

Traditional MCAs have an Unpredictable Payment Period

Tieing payments to revenue trends means that the payment period for the traditional MCA can be rapidly accelerated by a very strong period of sales (e.g., BFCM). This acceleration in payments will inhibit businesses’ ability to realize the incremental profit margin a good ecommerce business should see from an upswing in sales.

Traditional MCAs Require Paying Fees on Unused Funding

Cash-in-bank funding theoretically provides customers with increased flexibility in how they can use the funds, but if the funds are not used immediately, customers will be paying their capital provider with the funds they just received, particularly if the payments are daily. This cost reflects a high implicit undrawn or standby fee.

Traditional MCAs Require Daily Debiting

Traditional MCAs traditionally debit the customer’s bank account daily, making it difficult for operators to do their cash flow planning effectively.

Clearco’s Invoice Funding is optimized for the needs of ecommerce businesses

To address weaknesses of the traditional MCA, including Clearco’s own original product, Clearco developed its Invoice Funding offering. Invoice Funding offers the best of a traditional MCA product offers while addressing its deficiencies to create the ideal funding solution for ecommerce businesses.

Clearco’s Invoice Funding Offers “Fixed” Weekly Payment With Flexibility

Clearco’s Invoice Funding product targets collecting a “fixed” weekly payment from customers, by collecting the lesser of a targeted capped amount and 30% of a customer’s weekly revenue. No advance payment will represent more than 30% of a customer’s revenue. This ensures customers retain the benefit of traditional MCAs debiting lower amounts during lower revenue weeks. Put simply, if a merchant’s revenues decline, Clearco’s weekly debit for an advance is capped, or maxed out, at 30% of revenues.

Clearco’s Invoice Funding Allows Customers to Fund Their Own Invoices Directly

To ensure customers are only paying for what they need, Clearco provides the capital to allow customers to pay for their invoice rather than depositing cash in a customer’s bank account. No more paying fees on unused funds.

But if Customers Still Prefer Cash in Bank, Clearco’s Invoice Funding Offers Receipt Reimbursements

In addition to funding invoices, Clearco’s Invoice Funding product also reimburses customers for expenses they already paid – depositing reimbursement cash directly in a customer’s bank account. Clearco understands cash is still sometimes king!

Illustrating the Benefits of Clearco’s Payment Structure

Many ecommerce companies experience peak sales periods during BFCM, and traditional MCA offerings that collect a percentage of revenues with no maximum cap can wreak havoc during this period.

Below is an illustrative example of an ecommerce business (let’s call it “Clearco Apparel”) who sells apparel and sees their revenues peak in November / December:

If Clearco Apparel were to work with a traditional “cash-in-bank” MCA provider and take a $2M advance with an 8% fee over an expected 6-month term and daily payments equal to 15% of revenues, their balance would be paid down as follows:

Traditional MCA is paid in just 3.5 months, but the MCA provider still collects the full fee!

Because Clearco Apparel’s revenues peak during BFCM and they end up paying 25% of the outstanding amount in a week, the effective payment period of the MCA is only 3.5 months, not the 6 months that the MCA provider advertised or estimated when they were pitching them in, say, August!  

This is what our CEO Andrew described in his blog last week as the “dirty little secret” of traditional MCA products! A traditional MCA provider pitches a 6-month product to a merchant during a period of rapid revenue growth and – presto! – the customer pays in a little over half the time they expected, and their effective cost of capital – and the MCA provider’s return! – significantly increases. Sounds great for the traditional MCA provider. Not so much for the merchant who’s trying to grow her business efficiently.

Compare the above scenario to Clearco Apparel taking funding from Clearco at the same fee over a 6-month term:

Clearco does not accelerate its payments, ensuring the term of the advance is always 6 months.

Clearco’s funding lets ecommerce businesses reap the rewards of big sales weeks by never taking more than the “fixed” weekly payment described in our contract. What does that mean for the customer? She can better plan and budget. She can reinvest excess profits into her business during a period of rapid growth instead of paying her MCA provider in half the time she thought it would originally take.

Clearco is Making Capital Planning Easier Without Losing Flexibility

As the ecommerce space has grown and business’ needs have changed, Clearco has adapted by adjusting its product to stay true to the Company’s mission of providing businesses with non-dilutive funding for sustainable growth. Clearco’s Invoice Funding product lets customers keep the upside of big revenue weeks by never collecting more than the agreed-upon “fixed” weekly amount, while still providing customers flexibility on low revenue weeks by never collecting more than 30% of their revenues.

We believe these product features distinguish Clearco from its peers. More importantly, we are certain they serve our customers’ interests best.

Gurman Sihota
Strategic Finance Associate, Clearco

Gurman Sihota is a Strategic Finance Associate at Clearco. Prior to Clearco, Gurman was an Investment Banking Associate at Scotiabank. A University of British Columbia (UBC) graduate, he pursued a Bachelor of Commerce, specializing in Finance. When he isn’t busy diving deep into the DTC ecommerce space, Gurman enjoys trying to learn how to hit a golf ball and trying new fitness classes.