What You Need To Know About A Merchant Cash Advance

Nearly everyone understands the concept of a cash advance, however, not many understand the context in which businesses are able to use them. If cash is tight, merchant cash advances are an option that small businesses can explore for quick cash, however there are things to consider before deciding that it is the best option.

Merchant Cash Advance

Unlike loans, where borrowed money is returned at a certain interest rate, merchant cash advances will provide businesses with an upfront sum of capital in exchange for a portion of their credit card income. As such, merchant cash advances are not considered loans, but will serve as a trade-off for future sales of the company. This means that a portion of each sale will go directly to the loaning company. As it is not a loan, usury laws do not apply, allowing companies to charge very high-interest rates, sometimes reaching triple digits.

Usage and Repayment Methods

The majority of businesses that utilize merchant cash advances are those unable to attain loans from other institutions due to unsatisfactory credit scores, or simply can’t afford a bank loan. It’s good to note that there are three different ways in which are you able to pay off the merchant cash advance: split, lockbox, and ACH withholding.

Split withholding is a repayment method in which debit or credit sales will automatically be split accordingly between the business, and the respective financing company. This method is the most favored, as the process is the most straightforward, and almost seamless in execution.

Lockbox withholding, often described as trust bank account withholding, is a method where all credit sales are deposited into a separate account managed by the finance company. This account serves as a holding ground where the correct percentage of sales is kept by the finance company, with the remainder of the sales going through a wire transfer. However, as this typically leads to a one-day delay in all sales made on cards, many prefer not to use this method.

ACH, or “Automated Clearinghouse” withholding is structured more as a sale of service. That is, the finance company will receive details of any card transactions, and deduct its respective portion from the business’s checking account. ACH withholding may also be processed by set amounts rather than percentage of sales.

Beneficial Scenarios

Not all benefits are overlooked however, as merchant cash advances can be more beneficial than loans during cyclical business seasons due to a the time-constraint of a loan. Additionally, smaller businesses may also not have the credit necessary for loans at any other institution. Finally, it is far less time to attain a merchant cash advance than it does to be approved for a business loan.