Latest posts by Henry Githinji (see all)
- Case study - March 19, 2018
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- Repayment of Merchant Cash Advances – a Little Different From Traditional Loans - March 19, 2018
Merchant cash advances
The concept of merchant cash advance was initially used to lend money to businesses in exchange for their future credit or debit cards sales. Over the years, this definition of merchant cash advance has evolved to now encompass a relatively wider context. These days, merchant cash advances refer to small business financing options characterized by short payment terms of between 18 and 24 months. Small regular repayments are mostly done by the end of each business day.
Important things about merchant cash advance
It is important to note that a merchant cash advance is classified as the sale of future credit card sales and not a conventional loan. Thus, the interest rates of merchant cash advances are not regulated.
Merchant cash advances are a borrowing option if your business needs a quick cash boost. What makes them even more appealing is the fact that there is no actual time limit for repayment. This makes them very flexible and attractive financing options especially from a small business perspective.
The rate of repayment is always directly proportional to the cash flow for the small business. Thus, the small business is never in a pressured position to pay back the advance. From a repayment point of view, a merchant cash advance is very different from a traditional small business loan where the repayment period and installment amounts are predetermined.
There are three different ways of paying back a merchant cash advance.
This repayment method involves an automatic split of sales amount between the lending company and the small business. The lending company gets a cut of between 10% and 20% of the day’s total sales. This is the most common type of repayment mode for merchant cash advances.
This is where the credit sales of the small business are deposited into a bank account controlled by the lender (financial company). The lender makes his deductions as per the terms agreed and then transfers or wires the rest of the money to the small business bank account. This repayment method is not popular as there can be many delays along the way.
ACH (Automatic Clearing House) withholding
This involves the financial company accessing the credit card sales information of the small business and then deducting its own portion before sending the rest of the money to the checking account of the small business. If the merchant cash advance is structured as a loan, the lending company will then deduct a fixed amount regardless of the amount of sale the small business makes that day.