How Is An MCA Different From a Traditional Business Loan For Seasonal Operations?

Each year, in April, a concern festers in Thomas’s mind. His ice cream shop, located near the beach, generates 78% of its annual sales income in only four months: Memorial Day to Labor Day. During these months, there’s $280,000 coming in. The remaining eight months? Just a trickle of $75,000 to keep the lights on.

Last year he attempted the obvious approach. In March, he went to a bank and asked for a $40,000 loan to stock his inventory, hire some seasonal help, and float him until his summer rush. The loan officer perused his books with an increasingly worried expression.

"Your December income is $6,200. Then in January, $4,800. Then in February, $5,100. How are you going to pay $1,350 a month when you are barely making $5,000?"

This year, Thomas needed the services of a merchant cash advance. The financier analyzed his statements for the summer months: $75,000, $82,000, $71,000. He was right on target. "Your busy season can afford 14 percent holdback. In the off-seasons, funds are reduced automatically." Approved.

This is why seasonal and MCAs go so well hand in hand.

Problem of Fixed Payments

For example, with a traditional bank loan, your monthly income is expected to be steady so that you can repay fixed installments easily. Take a loan of $40,000 with an interest rate of 8% for a period of three years at a fixed monthly payment of $1,252 for 36 months

As a yearly venture, such a plan amounts to financial suicide.

Think about Thomas and his sales movement in the month of February. He earns sales to the tune of $5,100. After calculating the cost of goods sold, which is approximately 35%, his gross profit is calculated to be $3,315. His fixed costs include rent of $2,800, utilities of $450, insurance premiums of $280, and his employees' costs amount to $800. 

In lean times, making a loan repayment not only will be difficult, it’ll be mathematically disastrous without dipping into existing funds or borrowing more money. Further, this goes on for eight months, hemorrhaging approximately $10,016 out of reserves before summer income season even begins.

The MCA Flexibility Advantage

Now, suppose Thomas has an $40,000 MCA, 1.32 factor, and 14% hold

February: Handles cards worth $5,100. Payment: $714 (14% of $5,100). Painful, but half the fixed loan.

March: Processes sales of $7,200. Payment: $1,008. Still doable while he

June: Earns $75,000. Receives payment of $10,500. A lot of cash, but the gross profit contribution this month is $48,750. This will help offset the payment, the

July: Income of $82,000. Expenses paid: $11,480. This is his best month

August: Made $71,000. Received payments: $9,

It’s the way that payments adapt to cash flow. During the first four crucial months, he pays aggressively and works to pay off the loan. During the last eight months, he scales back payments to what he can truly afford. It’s brilliant.

Payment occurs mostly during the lucrative summers when the cash flow is good, instead of forcing the business to make equal repayments during the winter months when the company can barely break even.

The Bank’s Seasonal Blindness

Banks aren’t wrong in being dismissive of seasonal enterprises; they use cash flow models developed to support monthly recurring income. Inconsistent cash flow” is listed as instability or bad management; they’re just unhappy with seasonal patterns.

A ski resort which derives 85% of its income during December-March faces a similar challenge. A Halloween costume store which derives 70% of annual sales during September-October cannot convince banks that a decline during February is normal and not a disaster.

The underwriters see the troughs but not the pinnacles, or they average the revenue for twelve months and overlook the fact that interest payments are due on a monthly basis.

The MCA Flexibility Advantage

Now picture Thomas with a $40,000 MCA carrying a 1.32 factor rate and 14% holdback:

February: Processes $5,100 in credit cards. Payment: $714 (14% of $5,100). Painful, but half what the fixed bank loan demanded.

March: Processes $7,200. Payment: $1,008. Still manageable as he ramps up for season.

June: Processes $75,000. Payment: $10,500. Significant, but his gross profit this month is $48,750—plenty to absorb the payment while stocking up and paying staff.

July: Processes $82,000. Payment: $11,480. His strongest month easily handles this.

August: Processes $71,000. Payment: $9,940. Still well within capacity.

The beauty? His payments automatically flex with his revenue. During the four months that matter most, he's paying aggressively and retiring the debt quickly. During the eight months of struggle, his obligations drop proportionally to what he can actually afford.

The MCA gets repaid primarily during his profitable summer season, exactly when he has the cash flow to handle it, rather than demanding equal payments through winter months when the business barely breaks even.

The Seasonal Success Story

Maria has her own landscaper company. This is when her company makes $340,000. This is when her company makes only $32,000.

She had to borrow $50,000 in February to purchase equipment, spring staff, and supplies for spring contracts. The banks said no to the loan: "You can't finance the money on a winter budget."

MCA borrowed $50,000 with a 1.30 factor and 12% hold back. The total amount for repayment was $65,000.

• February, March: Two incomes: $6,000
• Apr-Oct: Joint $59,000 

By November, it was all repaid. The whole $15,000 was footed during her profitable months. The winter months, however, required just nominal amounts she was capable of paying even with less income.

Maria tended her MCA for three years, borrowing money in late winter and paying it back in season, so she entered winter every year with no debt. This higher annual cost of borrowing ($15,000) was what she charged herself to finance, which suited her instead of combating her seasons.

The Math That Matters

Yes, they are more expensive when considering absolute dollars. Maria paid $15,000 per year for funds that would have otherwise cost $3,000 via a bank loan. After three years, Maria would have paid $45,000 for an MCA as opposed to a hypothetical $9,000 through a bank loan, that is a $36,000 difference.

However, the truth is that the loan from the bank would require payments of $1,150 each month from November to February, which would be problematic since the artist is only getting $8,000 every month during this time. Over half the returns the artist gets would go to repaying the loan.

The “cheaper” option would have made her broke. The “expensive” option allowed her to flourish.

When Bank Loans Work Better "MCAs aren't always the solution to the problem. When you find yourself 

• Sufficient reserves to fund 6-12 months of fixed expenses 
• Capabilities to support personal salary earnings during peak periods to offset compensation costs during off-peak periods. 
• Extended timelines that offer you a chance to apply during peak season when business seems good 
• Strong credit and 2+ years of tax returns with profitability 

Finally, the less expensive bank loan option, which requires a constant payment, may be a worthwhile option. 

The Seasonal Verdict

 In the case of seasonal businesses, the decision between the two options isn’t just about which one is the cheapest or fastest. It actually depends on whether the funding model aligns with the nature of your business. Banks provide cheaper capital with stiff payment terms that are applicable to business. MCAs provide more expensive capital with flexible payment terms that go up and down in line with the seasonal reality. Thomas is faced with neither good nor bad funding options. 

He is faced with funding options that are considerations of his cyclical funding patterns and funding options that do not recognize patterns, during times when the ocean is cold and nobody wants ice cream. Other times the most expensive choice will be the only effective one. 

Other times the most effective choice will be more expensive than one needs to be willing to pay, especially if the less expensive choice comes with conditions for failure. As far as businesses that are seasonality-driven are concerned, MCAs are not the ideal choice, but rather the best choice that comes in sync with how businesses truly make money.