A merchant cash advance is not a loan: a funder buys a portion of a business's future receivables for a lump sum and collects a set share of sales until an agreed total is remitted. Oceanline Loans, a small-business funding broker in Idaho Falls, Idaho, explains holdbacks, factor rates and stacking, and connects Bonneville County owners with funders that set the terms.
| What it is | Future receivables bought for cash; not a loan |
|---|---|
| Priced with | A factor rate, which is not an interest rate |
| Collected by | A holdback share of sales or a fixed debit |
| Ends when | The agreed total has been remitted |
| Fits | Steady card or deposit volume, short horizon |
| Who sets terms | The funder |
Merchant cash advances in plain terms
A merchant cash advance is not a loan. The funder pays your business an amount now and, in return, acquires the right to receive a portion of future sales up to a fixed total. That total is the advance multiplied by a factor rate. Because it is structured as a purchase rather than a loan, the funder's contract does not use interest rates, terms in months or a principal balance in the usual sense.
A worked example with hypothetical numbers
Suppose a funder offers an advance of a hypothetical $10,000 at a factor rate written as 1.3. The total to be remitted is $10,000 × 1.3 = $13,000, so the cost of the advance is $3,000. If the agreement collects a holdback of 10 percent of daily card sales and sales average $1,000 a day, about $100 is remitted each business day, and the total would be reached in roughly 130 business days. If sales slow, each day's remittance shrinks and the period lengthens; if sales rise, it shortens. These figures illustrate the arithmetic only; they are not typical or offered terms.
Because the total is fixed and the time is not, an annualized cost can look very different depending on how fast sales come in. Compare the dollar total you would remit with the total repayment on a working capital loan over a similar period.
Holdback, fixed debits and reconciliation
Some advances collect a percentage of card settlements directly from the processor. Others debit the business bank account a fixed amount each business day or week, estimated from expected sales. With fixed debits, many agreements describe a reconciliation process: if actual sales fall short, the business can ask for the debit to be adjusted to match the agreed percentage. Ask how reconciliation is requested, what documents it takes and how quickly it is applied.
Stacking, renewals and early payoff
Stacking is adding a second advance before the first one has been fully collected. Each funder collects its own share, so combined daily remittances can rise quickly; many contracts prohibit stacking. Renewals offered before an advance is fully remitted often roll the unpaid balance into the new advance, so the cash you actually receive is smaller than the headline amount. Ask whether the total is reduced if you pay early; in many contracts it is not.
Is a merchant cash advance legit, and does it report to credit?
Merchant cash advances are a real and widely used product, but terms vary a great deal, so read the entire contract and ask for the total remittance in writing. Many funders do not report regular remittances to business credit bureaus, though they may check credit when you apply and may file a UCC financing statement. What is often called merchant cash advance debt is the unremitted balance of the purchased receivables, which the funder can pursue under the contract.
When an advance may or may not fit
An advance can suit a business with steady card or deposit volume that needs money for a short period and has been declined for, or cannot wait for, a loan. It is usually a poor fit for long-lived purchases, for businesses whose sales are uneven, and for covering another advance's payments. Restaurants and retailers meet these offers most often; see financing by industry, the county figures on the Idaho Falls, ID page, and how a request moves through us.
By Oceanline Loans · Updated