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Understanding Merchant Cash Advance

Merchant cash advance is also called as “credit card receivable funding”, which was formerly structured as a lump-sum payment provided by credit card or debit card companies to a business, upon an agreed future percentage. Merchant cash advance is popularly used for small business funding, characterized by short payment terms, generally under twenty-four months, with small regular payments and giving a big advantage to small business owners as compared to traditional bank loans offering large monthly payments and longer payment terms. Merchant cash advance is easy-to-manage, quick and efficient form of funding small businesses, based on a business credit sales. The term is used to describe purchases of short-term business loans and future credit card sales receivables, and the main criterion for being authorized and approved to have a merchant cash advance is having a predictable credit card sales volume.

The companies providing merchant cash advance to fund businesses gain a certain percentage of the business daily credit card income, that is done directly from the processor, clearing and settling the credit card payment until the obligation has been paid off. The terms of merchant cash advance providers vary, but it depends on the proof provided such as having a stable or steady credit card sales volume. The approval for a merchant cash advance is usually three to fourteen days upon completion of the application process, which is really fast and 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. Merchant cash advance is used by retail business sellers that does not qualify for regular bank loans.

The different payment options are split withholding, lock box and ACH withholding. For seamless collection of funds, most business owners choose split withholding, wherein the credit card processor automatically splits the credit card sales between the finance company and the business with the agreed percentage. The least preferred method is the lock box, also known as “trust bank account withholding”, wherein the credit card sales are deposited into a specific bank account which is controlled by a finance company, and the agreed business portion is forwarded to the business via EFT, ACH or wire transfer. In ACH withholding, the merchant cash advance provider directly deduct the portion from the business’s checking account via ACH, when structured as a sale, 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.