Finance Talk: Understanding Merchant Cash Advance

Merchant cash advance is also popularly called “credit card receivable funding”, which was originally structured as a lump-sum payment provided by credit card or debit card companies to a business upon an agreed percentage. Merchant cash advance is now used for funding small businesses, which is characterized by short payment terms, generally under twenty-four months, with small regular payments, giving a huge advantage to small business owners as compared to large monthly payments and longer payment terms with traditional bank loans. Merchant cash advance is easy-to-manage, quick and efficient form of funding small businesses, based on a business credit sales. Predictable credit card sales volume is the main criterion for getting approved for a merchant cash advance, and this term is used to describe purchases of short-term business loans and future credit card sales receivables.

Merchant cash advance providers gain a certain percentage of the business daily credit card income, which is done directly from the payment processor, that clears and settles the credit card payment until the obligation has been paid met. The terms of merchant cash advance providers vary, but it depends on the proof provided such as having a stable or steady credit card sales volume. Usually, it will only take three to fourteen days upon completion of the application process for your merchant cash advanced to be issued, which is really fast, then you can spend the proceeds on whatever you think is good for your business. Thus merchant cash advance creates a great opportunity for business sellers to grow and expand without undergoing the complex process of traditional bank loan approval. Retail business sellers who are not qualified for regular bank notes often use merchant cash advance to get funding for their business.

The three repayment methods available are split withholding, lock box and ACH withholding. The most preferred method chosen by many retailers is split withholding, because it provides a seamless collection of funds, wherein the credit card processor automatically splits the credit card sales between the finance company and the business with the agreed percentage. Lock box is the least preferred method because it is usually one day delay, and this is also known as “trust bank account withholding”, wherein the credit card sales are deposited into a specific bank account which is controlled by a finance company, and the agreed business portion is forwarded to the business via EFT, ACH or wire transfer. When it is a structured sale, the merchant cash advance provider directly deduct the portion from the business’s checking account via ACH in ACH withholding, and if it is structured as a loan, the finance company just debit a fixed amount from the daily sales regardless of the amount of business sales.