Merchant cash advance: what it’s all about

Sometimes, your business may experience cash flow issues. It could be cash needed to pay your employees and suppliers, get new inventory or expand the business. As a business person, you want a fast solution, a way to pump money into your business quickly. Time is money in this case and so every minute counts. Traditional loans may take a long time to process, especially if we are talking about a large sum of money. Background checks will be carried out, then they will check your credit score and ask for collateral for the loan. The process could be too long and complex. Thus, you will look for better solutions that are fast and convenient for your business and safe for yourself. This is where merchant cash advance comes in.

Merchant cash advance is a purchase of a fixed dollar amount of your business’ future credit card or debit card sales receivables. What’s a Merchant Cash Advance? Let’s break this down for better understanding.

What is a merchant cash advance

What is a merchant cash advance?

What is a merchant cash advance?

What is merchant cash advance? Merchant cash advance started long ago, but it was structured differently. It would involve a large sum of cash payments that would be done to a business by a merchant cash advance company, in exchange they would get an agreed upon percentage of future credit card or debit card sales. This means that repayment would be done slowly. You have to realize that a merchant cash advance is not categorized as a loan.

Times have changed and now the merchant cash advances have been adjusted structurally to accommodate all sorts of business, big or small. Right now, the definition of a merchant cash advance is as follows: a merchant cash advance is an exchange of a specific amount of payment done to a business in exchange for future credit card and/or debit card sales. The payments are done in small portions over a short period of time as specified between the business and merchant cash advance company. This description has helped to bring the diversification of the business that looks for this financial plan as an option for their business.

The structural concept

The structural concept

The structural concept

Merchant cash advances are about the exchange of future credit card sales and/or debit card for instant cash. Basically, the owner of the business gets the cash injection and then as the business makes money the company that bought  the future sales gets back its money slowly.

Let’s see a simple example. A business decides to take out a merchant cash advance worth about $30000 in exchange for about $35000 future sales. As the business goes on making money, it has to pay between 10-25% of every credit card or debit card sale it makes to the lending company.

Payment is structured according to the agreement between the borrower and the lender. The business may decide to make a payment by the end of each business day. This means that calculations are done, and then the cut is made and sent to the merchant cash advance company. However, some businesses have adapted the technologically advanced payment mode. This involves partnering with payment processors. Thus, payment is done automatically and a percentage of the daily sales is transferred automatically to the merchant advance company.

The fact that this financing option plan is not described and characterized as a loan means that the providers of this service disregard any laws and legislations imposed on loans everywhere, citing the reason that the laws do not touch their financial modification. This ultimately means that they can set interests up to anywhere they deem profitable enough for themselves. After all, there is very little in place to stop them. However, they are quite reasonable as each deal they make all depends on the structure, sales and projection of a business. It’s all about what comes out of a business a certain time and how fast they will get their money. Instead of using the annual percentage rate to calculate interest, this plan uses specific business factor rates to calculate how much interest the company pays back.

Repayment options of merchant cash advance

Repayment options of merchant cash advance

Repayment options of merchant cash advance

This plan is mostly used by small business enterprises and companies that technically cannot qualify for a traditional loan. It is important to state that a merchant cash advance is always more expensive than getting a traditional bank loan. However, the business that uses like its convenience. The fact that the merchant cash advance company don’t go looking at the borrowing company’s credit score makes merchant cash advances even more attractive.

  When it comes to repayments, the merchant cash advance companies want to give their customers enough options to let them repay conveniently. The repaying options are:

  •         Slip withdrawal
  •         Lockbox
  •         ACH withholding

Slip withdrawal

This is the most popular way of repayment. Typically, this mode of repayment involves the automatic slip of sales. This means that if a credit card sale is made at the business which borrows the merchant cash advance, the payment is split such that 10-25% of the total sales go to the company while the rest remains in the business. The method is convenient for all types of businesses. Both parties get their money automatically with no conflicts or delays.

Lock box

This mode of repayment is also known as the trust bank account withholding. This entails the deposition of all sales made by the company into a bank account that is controlled by the cash merchant advance company. Then according to the agreed terms, the company sends the business’s portion of the sales through wire transfer into its deposit account. This option is the least preferred because it is prone to all sorts of delays.

ACH withholding

This mode is divided into two; it will either depend on if the agreement is “for sale” or “as loan”. As a sale, the company gets the credit card sales information and then deducts its portion for itself. When structured as a loan, the company will not regard if the business has made a sale. The company deducts a fixed amount of cash daily.