Merchant Cash Advance 101

What is a Merchant Cash Advance?

A merchant cash advance is structured as an upfront lump-sum payment to a business in exchange for an agreed-upon percentage of future credit card and debit card sales. You can read in more detail the benefits of merchant cash advances.

How does a Merchant Cash Advance Work?

In layman’s terms, following the approval of the application, the merchant will receive the advance with repayments being structured in one of two ways. In a typical merchant cash advance, you will receive an advance in exchange for a portion of your future credit and debit card sales. This portion is taken out of your daily credit and debit card transactions until the advance fee if paid off. With ACH Funding, you will receive an advance that is repaid by remitting fixed daily or weekly debits directly from your bank account. ACH Funding is becoming more commonplace as it also appeals to businesses that are not primarily tied to credit and debit card sales.

What is a Factor Rate?

Because this is not your typical loan, instead of paying an interest rate on a merchant cash advance you instead are paying a factor rate. This factor rate varies from roughly 1.1 to 1.3 depending on the several factors including monthly credit sales, business credit rating, the industry your business sells to and the age of the business. While not expressed in percentages you can easily convert to percentages. 1.1 would be 10% and 1.3 would be 30%. In other words if you wanted to be funded $20,000 at a factor rate of 1.2, or 20%, you would have to pay back $4,000 or $24,000 total.

What Determines Factor Rate

There are any number of variables that will determine your factor rate as well as the payback period. A merchant cash advance company will take into consideration the nature of your business and the nature of your industry. They will take into account how much you are looking to have funded and the expected payback period. More important perhaps is the number of years you have been operating your business and how much the business takes in each month in credit card and debit card transactions.

A Small Leader in Business Lending

CapitalFront was launched with a simple premise – create an easy, accessible and rapid process for small and mid-size businesses to fund their growth. CapitalFront strives to bring a wide array of financial products, including merchant cash advance, receivable financing, factoring, SBA lending  and fixed rate term solutions, to independent business owners nationwide. Call today or fill out our online application.