A merchant cash advance is a purchase of a business's future receipts: the funder pays a lump sum now and collects an agreed total through a share of sales or fixed debits. It is not a loan. Sandland Credit, a small-business funding broker in Grand Junction, CO, explains holdbacks, reconciliation and stacking and compares advances with loan options before any request goes to a funder.
| What it is | A purchase of future receivables. A merchant cash advance is not a loan. |
|---|---|
| How it is collected | A holdback percentage of sales, or fixed daily or weekly debits |
| How cost is stated | A factor applied to the advance; the total to be remitted is fixed in the contract |
| Clauses to read | Reconciliation, stacking limits, default, personal guarantee |
| Who decides | The funder sets the price and every term |
| Office | 516 Main St, Grand Junction, CO 81501 · (970) 238-2048 |
Not a loan: what is actually being sold
A merchant cash advance is not a loan. In a typical advance, a funder pays your business a lump sum and, in exchange, buys a fixed amount of your future receipts, often called the purchased amount. You then remit that amount to the funder out of your sales until it has been delivered in full. Because it is structured as a sale rather than a loan, the contract talks about remittances and purchased receivables rather than interest and principal.
Holdback and fixed remittance
Advances are collected in one of two ways:
- A holdback percentage. An agreed share of each day's card sales or deposits goes to the funder. When sales are slow, less is collected; when they are strong, more.
- A fixed daily or weekly debit. The same amount is drawn from your bank account on a schedule, sized from an estimate of your sales. These contracts usually include a reconciliation clause.
The difference matters most in an uneven month. Fixed versus percentage remittance lets you run the percentage case in the calculator and the fixed case by hand, with your own numbers.
Reconciliation when sales drop
Many fixed-debit agreements let you ask the funder to adjust the debit to match the agreed percentage of your actual receipts if sales fall. How you ask, what records you must send, and how quickly an adjustment takes effect all vary by contract. Read the reconciliation clause closely: if it is vague, or hard to use in practice, a fixed-debit advance behaves much like a fixed payment whatever happens to your sales.
Factor, total remittance and cost
Advance pricing is usually stated as a factor: a multiplier applied to the advance to give the total you will remit. The factor is not an interest rate and cannot be compared directly with a loan's rate, because the advance has no fixed term. The shorter the time it takes to deliver the purchased amount, the more expensive the advance is on an annual basis. Always ask for three numbers in writing: the amount you will receive after any fees are deducted, the total you will remit, and the estimated remittance amount per day or week.
Stacking, default and personal guarantees
Stacking means taking a second advance while the first is still being collected. Many agreements forbid it, and two sets of daily debits can quickly consume a business's cash. Default terms vary; common triggers include changing the bank account the funder debits, blocking debits, or closing the business without notice. Many advances also include a personal guarantee of the owner's performance under the agreement. Ask what each of these clauses says before signing.
Does an advance appear on credit reports?
Practices differ between funders. Many do not report remittances to the business credit bureaus the way lenders report loan payments, so an advance may do little to build the business's credit file. A funder may still check your credit before funding, and a UCC financing statement filed for the advance is a public record that other lenders will see. Ask the funder directly what it checks and what it reports. Colorado UCC search shows how to see filings against your business.
When an advance comes up, and what to compare first
Advances are usually offered to businesses with steady card or bank deposits that need money quickly or do not fit a lender's requirements. Before accepting one, compare it with working capital loans and lines of credit on total cost and on what the collections will do to your daily cash. If the comparison favours the advance, make sure the purchased amount and the remittance schedule are ones your sales can carry.
By Sandland Credit · Updated