Understanding the Merchant Cash Advance

When it comes to alternative funding sources for your business, a merchant cash advance may be right for your business. However, before choosing any funding option, learning more about it is essential

The Merchant Cash Advance

The merchant cash advance is commonly used by businesses that are unable to secure a traditional bank loan. In this case, you receive cash for a part of your future income. With this system, you can receive funds based on future credit card sales. If you don’t take credit cards, then this option isn’t right for you.

The merchant cash advance isn’t a loan. It is a cash advance you repay automatically when you make a credit card sale. Interest will be applied to the funds you receive.

Parties Who Take Part in the Merchant Cash Advance

There are three parties involved in the process. This includes the borrower (you), the provider (lender), and a third party that processes the transaction. While a merchant cash advance is not a loan, to better understand the arrangement consider yourself as the borrower. The funds provider is the entity that provides the advance.

The processor is typically an entity that has some type of pre-established relationship with you. They are then the ones who must collect the funds from the customers. The processor’s job in the merchant cash advance is to allocate the funds between the provider and borrower.

The Merchant Cash Advance Process

Like the three parties who are involved in the merchant cash advance, there are three figures required to create the agreement. The amount of the advance, the amount to be repaid, and the holdback percentage. After an agreement is reached, the cash will then be put into the business’s bank account. Every day after that, the percentage of daily revenue agreed on will be withheld and paid to the merchant cash advance provider. This amount is called the holdback and is equivalent to collateral that is used for traditional loans.

The holdback payments will continue until the advance is paid in full. They do not include the interest that must be paid as a fee to get the advance. Usually, the holdback percentage is determined by the funds your business receives, the length of repayment, and the size of your monthly receivables.

While the merchant cash advance may not be right for all businesses, it does provide some benefits. Keep the above information in mind to see if it is a good fit for your business. Learn more about merchant cash advances by contacting the professionals at Valpzac Capital today.