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How Merchant Cash Advances Work

Merchant cash advances have gained popularity over the past few years. Those business owners who need quick access to capital can obtain funds from merchant cash advance providers.

A merchant cash advance is an advance given on a small business credit card receipts, and it is not a typical loan.

What is a merchant cash advance?

They are sometimes referred to as cash advance loans. However, merchant cash advance providers usually don’t describe this product as a loan. They operate under a different set of rules compared to the usual business loan regulations.

With a merchant cash advance, your business is offered a cash advance for a specific amount, with a high repayment amount within a stipulated period. These providers typically charge premiums of 30% or more on the amount they offer.

They also enable a business owner who accepts credit payments or other forms of payments to get advance on the funds continually flowing through their business’ merchant account.

How Merchant Advance Works

First, an agreement is signed between the small business and the merchant cash advance provider concerning the amount, payback amount and the interest. After the deal is successfully made, the cash advance is then transferred to the business’ bank account in exchange for credit card receipts.

Every day, the agreed percentage of the credit cards receipts are retained to repay the merchant cash advance, commonly known as ‘holdback,’ and the repayment process will be continuous until when the advance is fully paid. There is no collateral needed in this advance, because of the easy and quick access to the owner’s merchant account.

If the transactions of a business increase, it becomes faster to repay the advance, because repayment depends on the percentage of the daily balance in the merchant account. The merchant withdraws low amounts of cash if the transactions are smaller on a specified da

Repayment Costs

Businesses that use a merchant cash advance repay approximately 20-40% of the amount borrowed. This percentage represents a factor rate which is equivalent to 1.2 -1.4

 The holdback percentage is mostly determined based on the following factors;

The amount of money the business receives
The repayment period of the cash advance
Monthly receivables

When Can A Company Opt For A Merchant Cash Advance?

 First, a merchant cash advance is ideal for a business when it requires quick access to capital. Secondly, if your company has enough cash flowing through the merchant account daily, you are in a position to comfortably make payments on the advance.

Thirdly, this is a significant option for those businesses that perform numerous credit card transactions monthly but have a weak credit profile.

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