Merchant Cash Advance 101

If you are a small business owner then we know that you need loans and advances of all sorts to keep running the operations of your business. Many types of loans with different features and terms and conditions are available in the market. But there are only a few that offer borrowers the ease of not asking for collateral. One of these ones is the merchant cash advance.

Introduction

A merchant cash advance is a loan that is extended by a financing company to you, being the borrower, in exchange for a specific percentage of your daily credit card sales. A fee is also charged on this exchange.

Another way to explain these types of advances is that a party purchases a certain portion of your future sales and in return extends you a loan amount so that you can have some upfront money for your day to day expenses. As the sales are made you are responsible to pay back the amount along with the decided fee.

Repayment Methods

Merchant cash advance can be repaid through three of these most widely used methods.

Split Withholding

As per the portion decided in the future sales, this is the method where the credit card processing company automatically splits the sales between the borrower and lender. This method is commonly used in the industry as it the most straightforward and the simplest one.

Automated Clearing House Withholding

In this method, the lender, either a finance company or a purchaser, receives the information of your credit card from which he/she directly deducts their portion from the checking account of the business using the service of an automated clearing house.

Trust Bank Account or Lock Box Withholding

Here all the sales that are done by the business are deposited in a bank account whose control is with the finance company that extended the loan. The company then forwards the amount decided for the business to them with a one-day delay which makes it a least preferred method for many businesses.

Pros and Cons of Merchant Cash Advance