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Business and Finance: Understanding Merchant Cash Advance

Merchant cash advance is also known as “credit card receivable funding”, and in the past it was formerly structured as a lump-sum payment provided by credit card or debit card companies to a business,with an agreed future 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. Basing on a business credit sales, a merchant cash advance is fast, easy-to-manage and efficient form of funding small businesses. The term is used to describe purchases of short-term business loans and future credit card sales receivables, and the main criterion for being authorized and approved to have a merchant cash advance is having a predictable credit card sales volume.

Merchant cash advance companies gain a certain percentage of the business daily credit card income, which is done directly from the payment processor, clearing and settling the credit card payment until the obligation has been paid off. 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. Merchant cash advanced may have higher rates compared to traditional methods such as bank loans, but it greatly provides business opportunities for business growth and development. Retail business sellers who are not qualified for regular bank notes often use merchant cash advance to get funding for their business.

The three payment methods available offered by merchant cash advance companies are split withholding, lock box and ACH withholding. Split withholding is the most preferred method of repayment, 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 portion, usually ten to twenty-two percent. The least preferred method is the lock box, 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. In ACH withholding, the finance company 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 sales.

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