Merchant cash advances work differently depending on the type of advance you choose.
In its traditional form, merchant cash advances are suitable for businesses that deal with large volumes of debit and credit card transactions. Today, the product has evolved into a second program that can benefit any small business.
The difference boils down to how the advance is repaid and how an MCA lender assesses rates and fundability.
Traditional Merchant Cash Advances
In a traditional cash advance agreement, a lender deducts a percentage of your credit or debit card sales on a daily or weekly interval. The process is known as a holdback.
The repayment period typically ranges from 3 to 24 months, though there’s no set-in-stone end date. The higher your credit card sales, the faster you’ll pay the advance off.
For example, say your lender holds back 15% of your daily credit card and debit card transactions. As your sales rise and fall, so do your MCA payments.
|Merchant Sales||15% Daily Holdback|
With a traditional merchant cash advance, your payment shifts to the pace of your income, helping you avoid cash flow disruptions when sales are down.
Traditional Cash Advance Requirements
MCA lenders determine advance amounts based on projected credit and debit card sales, whereas the holdback percentage is calculated on the advance amount and the expected payback time. Typical holdback rates fall within the 10% to 20% range, though this can vary based on the business and risk.
ACH Merchant Cash Advances
The second variation of a merchant cash advance is known as an ACH MCA, or an Automated Clearing House withdrawal.
In this agreement, payments to MCA lenders are fixed and occur over a set term. This means your daily or weekly payment will remain the same regardless of your sales volume. Funds are drawn automatically from a business owner’s linked bank account.
ACH Merchant Cash Advance Requirements
ACH advances are based on a business’s total projected revenue, not on credit card or debit card transaction totals alone. As a result, this type of business advance applies to all small business owners — not just those with high credit and debit card sales.