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Merchant cash advances – What you need to know

Henry Githinji

Henry Githinji

Henry plans to be an entrepreneur with his own financial consultancy firm, specializing in in binary options and stock trading. Henry is a day trader and plans to use the capital he makes to launch his business. He plans to build a portfolio that attracts investors through his trading performance.
Henry Githinji

Merchant cash advances



The term merchant cash advance was initially used to describe the large sum of money lent to a business in exchange for its future credit or debit cards sales. Times have changed and the definition has evolved to encompass a wider context. Now, 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.

They could be higher than normal loans. Merchant cash advances are usually offered to small businesses which cannot qualify for small business loans or those that have bad credit history.

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.



Repayment methods

There are three different ways of paying back a merchant cash advance.

Split withdrawal

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.


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