The most important thing to understand about a merchant cash advance is that it is not a loan. With a loan, you acquire capital and pay it back over time with interest. Repayment terms are set by an amortization schedule and, usually, fixed interest terms. A merchant cash advance is an advance on future revenues.
Because it is an advance on future revenues, the business that receives the advance must pay off the financing source. The following three methods of repayment are the most popular repayment methods for merchant cash advances.
- ACH Withholding – ACH withholding can be structured in a number of ways, but the general repayment method entails paying the finance company an agreed upon percentage of future sales. For instance, if your sales for the month of June 2019 equal $10,000 and your repayment agreement is 30% of your sales, an automatic withdrawal of $3,000 to the finance company for that month is taken out of your business bank account. The repayment schedule can be set up daily, weekly, monthly, or as invoices are paid.
- Split Withholding – Split withholding is like ACH withholding except that the percentage of sales agreed upon is withdrawn from your customer’s payment right off the top, as opposed to the back end of the payment processing. With this method of repayment, you know your financing is being paid off before any of your other bills.
- Trust Bank Account – Also called lock box, with a trust bank account, all of your receipts are deposited into a bank account controlled by your financing company. The company then takes out the repayment percentage and forwards the rest of the money onto your business. The downside to this repayment method is that it often results in a delay for your business receiving your funds, and that can often cause cash flow problems for your business.
A merchant cash advance is a lump sum payment on future sales receipts. It’s a good way to finance an expansion or growth of a business when you have steady sales over an extended period of time.