Merchant Cash Advance – Understanding Repayment.

Steve O'ConnorCapital Advance, Card Processing, Cashflow, Merchant Cash AdvanceLeave a Comment

There’s a lot of press out there about merchant cash advances – both good and bad. One of the biggest factors that may determine if a merchant cash advance is good for your business is being educated about the product. There are many types or merchant cash advances with slightly different features. As a business owner, you need to understand the product and the impact it will have on your revenue and cash flow before signing on the dotted line.

 There’s a lot of press out there about merchant cash advances – both good and bad. One of the biggest factors that may determine if a merchant cash advance is good for your business is being educated about the product. There are many types or merchant cash advances with slightly different features. As a business owner, you need to understand the product and the impact it will have on your revenue and cash flow before signing on the dotted line.

How a Merchant Advance Works:

A merchant cash advance is payment today for tomorrow’s credit and debit card sales. A merchant cash advance provider will pre-purchase future sales at a discount, and offer you an upfront payment, commonly known as the advance amount. The advance amount is determined by your sales history and length of time in business. You do not need collateral, or even a business plan to apply. Your credit score will probably come into play, but not as much as it would in traditional bank lending. The provider will then collect on the advance by taking a small percentage of your daily card sales until the balance is paid off. This percentage is referred to as the daily amount or percentage. Click here for more detail.

Repayment of a Merchant Advance

One area of considerable confusion is repayment. How is remittance made from the business to the merchant cash advance providers? Here’s a breakdown of the three most common methods for repayment.

1.    Split Funding or Batch Splitting.

With split funding, your card processor collects payment and forwards the agreed upon daily amount to the merchant cash provider’s account and deposits the  balance of the card sales to your merchant account. The card processor can only split the payments if you’ve given explicit authorization to do so. Batch splitting offers a way to settle where payment control is with a neutral third party. You don’t have to calculate cost or cut a check. Plus, 100% of the amount deposited to your account is yours to spend.

2.    Intermediary or a For the Benefit Of “FBO” Account.

This option requires redirecting deposits to a new for the benefit of, or “FBO” account established by the provider. Your card processor still collects payment on all sale transactions. Instead of depositing the money to your account, the funds are deposited to an intermediary account set up by the provider for the benefit of your business account. The merchant cash advance provider will then retain the daily amount from the account each day. Once the withdrawal is done, the balance is transferred to your operating bank account. Some merchants prefer this method because the merchant cash advance provider does not have direct access to their bank account. You don’t have to calculate payment, and you don’t have to cut a check. The downside of using an intermediary account is that you’re waiting for the provider to debit their amount and to deposit the balance.

3.    Direct Debit.

With direct debit, the merchant cash advance provider collects payment from you directly after all sales are processed. The daily amount is agreed upon before the direct debit starts, so you should be aware of the amount that will be deducted from your account. The merchant cash advance provider will withdraw the amount from your bank account electronically via ACH (Automated Clearing House). You don’t have to remember to cut a check; you don’t have to calculate payments. You do need to remember that the amount is due from the total sales deposited to your account and that you cannot spend 100% of your bank balance.

Make sure you understand the repayment method offered by your merchant cash advance provider prior to sign up. It will help you to manage your business cash flow properly and prevent misunderstandings and “surprise” withdrawals.

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