A Merchant Cash Advance is a lump sum payment to a business in exchange for an agreed upon percentage of future credit card and/or debit card profits. The way this works is Merchant Cash Advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income. This percentage is taken directly from the processor that clears and settles the credit card payment. A company’s remittances are drawn from customers’ debit- and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with credit card payment processors and take payments directly from a business owner’s card-swipe terminal.
A Merchant Cash Advance is most often used by retail businesses that do not qualify for regular bank loans. A business cash advance can be expensive compared with interest on a bank loan, ranging from 10% to 100% effective interest. Merchant cash advances are not loans – they are a sale of a portion of future credit and/or debit card sales. Therefore merchant cash advance companies claim that they are not bound by specific laws that would limit interest rates.
Despite the cost of merchant cash advances, the structure has many advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Additionally, the ease, simplicity and speed of the application process, as well as the lower security position (i.e. behind that of the bank and landlord) associated with merchant cash advances are significant advantages.
There are generally three different repayment methods for the business:
- Split Withholding, or Split Funding: When the credit card processing company automatically splits the credit card sales between the business and the finance company per the agreed portion (generally 10% to 22%). This is generally the most common and preferred method of collecting funds for both the clients and finance companies since it is seamless.
- Lock Box or Trust Bank Account Withholding: All of the business’s credit card sales are deposited into bank account controlled by the finance company and then the agreed upon portion is forwarded onto the business via ACH, EFT or wire. This is the least preferred method since it results in a one-day delay in the business receiving the proceeds of their credit card sales.
- ACH Withholding: When the finance company receives the credit card processing information and deducts its portion directly from the business’s checking account via ACH.
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