How does a Merchant Cash Advance Work?

We have gone into greater detail of the benefits of a merchant cash advance but have not described the ins and outs of how the whole process works. If you are looking for means of financing you most likely already know that through a merchant cash advance you can receive upfront funding on future credit card and debit card sales. But how is the money paid back? What type of rates are associated? How long is the payback term? How long does the process take? These are are questions that will be visited in this article.

Application Process

While most companies online will advertise “Payment in 1 to 2 Business Days” keep in mind they are referring to one to two business days after the application is approved. Before a merchant cash advance company approves or denies your funding application they have to look at a number of financial statements and general business documents. Some companies may only request basic information about the business along with credit card statements while other companies may request bank statements, articles of incorporation, tax returns, k-1 document, financial statements, verbal references, phone interviews, and a site inspection.

The merchant cash advance company will take into consideration all of the requested documentation along with an evaluation of average monthly business income and number of years in business when determining the contract they feel comfortable with. The contract will detail the amount of the cash advance and the percentage of monthly credit card receipts the business will pay in return.

Merchant Cash Advance Contract

The contractual agreement, will discuss in detail the advance amount, payback amount and holdback percentage. Once the contract is signed by both parties, the advance will be transferred. The holdback percentage is the portion paid back on a daily basis based on credit card receipts. The more credit card transactions that take place, the faster the advance will be paid off. The benefit here is that if a business has a slow month it is not penalized with paying interest rates.

Merchant Cash Advance Example

Let’s say you are advanced $10,000 with a payback rate (factor rate) of 30%. This means you will receive $10,000 and pay back an additional $3,000 for a total of $13,000. Moreover, your contract stipulates a holdback of 13% of your credit card transactions until the advanced amount is paid off. If you average $10,000 in monthly credit card transactions, $1,300 will be paid back to the merchant cash advance company each month and you will pay back the total amount advanced in 10 months.

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.

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