Finance Talk: Understanding Merchant Cash Advance
Merchant cash advance is also popularly called “credit card receivable funding”, which was originally structured as a lump-sum payment provided by credit card or debit card companies to a business upon an agreed percentage. The term is now commonly used in funding small businesses which is characterized by short payment terms, generally under twenty-four months, with small regular payments, which is more beneficial to business owners when compared to large monthly payments and longer payment terms with traditional bank loans. Basing on a business credit sales, a merchant cash advance is fast, easy-to-manage and efficient form of funding small businesses. Merchant cash advance main criterion for approval is having a predictable credit card sales volume, and the term is used to describe purchases of short-term business loans and future credit card sales receivables.
Merchant cash advance providers gain a certain percentage of the business daily credit card income, which is done directly from the payment processor, that clears and settles the credit card payment until the obligation has been paid met. Generally, providers of merchant cash advance offer different terms, and it usually depends on the proof provided such as having a stable or steady credit card sales volume. It only takes about three to fourteen days upon completion of the application process for you to receive your merchant cash advanced, and then you can spend the proceeds on whatever you think is good for your business. Thus merchant cash advance creates a great opportunity for business sellers to grow and expand without undergoing the complex process of traditional bank loan approval. Retail business sellers who are not qualified for regular bank notes often use merchant cash advance to get funding for their business.
The three payment methods available offered by merchant cash advance companies are split withholding, lock box and ACH withholding. The most preferred method chosen by many retailers is split withholding, because it provides a seamless collection of funds, wherein the credit card processor automatically splits the credit card sales between the finance company and the business with the agreed percentage. In lock box or also called as “trust bank account withholding”, credit card sales are deposited into a specific bank account which is controlled by a finance company, and the agreed portion is forwarded to the business via EFT, ACH or wire transfer. When it is a structured sale, the merchant cash advance provider directly deduct the portion from the business’s checking account via ACH in ACH withholding, and if it is structured as a loan, the finance company just debit a fixed amount from the daily sales regardless of the amount of business sales.
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