Nearly everyone knows what a cash advance is, but did you know that businesses can also get a cash advance? A merchant cash advance is a way for small businesses to get cash quickly and without hassle, but is it right for you?
Merchant Cash Advance
A merchant cash advance is a way for companies to provide funds to businesses in exchange for a percentage of their daily credit card income. Merchant cash advances are not loans, but rather act as a portion of future credit/debit card sales. When a payment is processed, an amount is directly withdrawn from the sale and given to the loaning company. Since it isn't classified a loan, it allows companies to charge high-interest rates as they are not bound by usury laws. In some cases, the APR can be in the triple digits.
Usage and Repayment Methods
Most merchant cash advances go toward retail businesses that don’t qualify for larger bank loans or can’t afford bank loans. There are three different methods to paying off a merchant cash advance: split, lockbox, and ACH withholding.
Split withholding is when the credit card processing company automatically splits debit or credit sales between the business and the financing company. Split withholding is generally the most preferred method of payment processing because it’s the easiest and is almost seamless.
Lock box withholding is also referred to as trust bank account withholding and is the method where all the credit card sales are deposited into a bank account controlled by the finance company. A percentage of the sales are removed and sent to the finance company while the business then receives its sales through wire transfer. Most prefer not to use this method as it results in a one-day delay in all card sales.
Automated clearinghouse or ACH withholding is structured as a sale. The finance company receives the card processing information and deducts its portion from the business’s checking account. ACH withholding may be processed by deducting a certain amount from the account regardless of credit card sales.
Beneficial Scenarios
Many small companies find a merchant cash advance much more beneficial than a loan because it allows more flexibility during slow sales seasons. Plus, smaller businesses may also have a harder time getting a business loan than merchant cash advance. Finally, it is faster to get a merchant cash advance, which gives the borrower access to the capital sooner than if they were to take out a loan.
