In Business, timing is everything. Unlike traditional modes of financing, a Merchant Cash Advance can get you nearly immediate funding. Depending on the revenue/sales your business generates, a Merchant Cash Advance can set your business up for good, for a long time.
Definition of Merchant Cash Advance?
It is a kind of lump-sum payment made by a lender in exchange for a fixed percentage/amount of future debit/credit card sales.
With a Merchant Cash Advance, your cash flow does all the talking. If you have a steady income through sales rolling in month after month, you’re likely to climb the list of eligible candidates for this type of funding.
Pros And Cons of Merchant Cash Advances
A Merchant Cash Advance is the most suitable alternative for businesses that require quick funding. For small businesses or businesses with poor credit, getting the bank to finance your business can be a Herculean task. That’s where the Merchant Cash Advance comes in.
These are some of the benefits of getting Merchant Cash Advance funding:
- No hidden fees.
- Higher chances of getting approved.
- No credit checks.
- Little-to-no paperwork.
- No fixed repayment structure.
- No collateral.
Of course, just as with every type of funding, the Merchant Cash Advance has its fair share of disadvantages.
Some of them are:
- Shorter payment terms.
- Not suitable for businesses that operate payment options other than debit/credit card transactions.
- High-interest rates.
- May have limitations. For example, you may not be able to take a month-long vacation until your debt is paid.
Merchant Cash Advance Options: A Definitive Guide
With Merchant Cash Advance, repayment is a smooth slide. As the repayment structure is dependent on the sales your businesses make in a month, you don’t have to worry about paying a set amount month after month.
Lenders associated with Merchant Cash Advance type of funding give a range of repayment options to the businesses borrowing.
These are the 3 most common repayment options:
- Split Withholding
- ACH Withholding
- Lock Box Withholding
Let’s look into these in detail.
Split Withholding works through credit cards. The financing company or lender is entitled to a specific cut of each credit card transaction. This percentage is usually agreed upon at the time of the application process.
The most common repayment option, in Split Withholding, your sale amount as recorded in your Point-Of-Sale machine will be divided into two parts. The credit card company will directly split the sales between the business and the lender as agreed. It’s a hassle-free repayment option as most of the work is done by the credit card company electronically and seamlessly.
Unlike Split Withholding that determines the cash flow based on credit card transactions, an ACH Withholding takes the business’s bank statements and bank account deposits to determine their cash flow, which influences the funding and repayment options given to a business.
ACH withholding has a fixed repayment option. A certain amount of cash will be deducted directly from a business’s bank account according to the repayment structure plan agreed upon. It could be daily or weekly.
There are 2 ways of going through with the ACH withholding repayment option:
- If done through the point of business, the credit card transactions will go directly to the lender who will then deduct the repayment percentage structure as agreed from the checking account of the borrower using ACH.
- If the Merchant Cash Advance is considered a loan, then the lender will deduct the daily repayment percentage from the borrower’s checking account without taking the percentage of sales made by the business into account.
Lock Box Withholding
Also called Trust bank Account Withholding, Lock Box Withholding transfers the complete amount from credit/debit card transactions of a business to the lender. After deducting the repayment amount, the rest of the fund is transferred back to the business in question through Automated Clearing House(ACH), wire, or Electronic Funds Transfer(EFT).
Keep in mind that this process takes time so you may not be able to access the day’s sale from your bank account on the same day. No wonder, this is the least favorable repayment option. Much more complex than Split Withholding, most businesses tend to steer clear of Lock Box Withholding because of the delay in the transfer of funds.
In essence, the repayment options of Merchant Cash Advance work through two structures:
- The sale structure-A percentage of sales as agreed between you and your lender is deducted, may change according to the revenue you generated during a certain period.
- Loan structure-A fixed repayment amount needs to be paid to the lender irrespective of the sales you made in that specific period.
Merchant Cash Advance options may differ from one finance company to the next. However, the three highlighted above are the most common types of repayment structures.
Keep in mind that Merchant Cash Advance is a temporary fix and while it may be beneficial in the point of view of eligibility and approval rate, it has its fair share of disadvantages. If you’re looking for Merchant Cash Advance to fund your business, make sure you’ve done your research and taken possible risks into account.