A merchant cash advance is not a loan: a funder buys part of a business's future receivables for a lump sum and collects an agreed total through a holdback or fixed debits. Lakeshire Business Funding, a small-business funding broker in Duluth, Minnesota, explains factor rates, holdbacks and total remittance before any request goes to a funder, which sets all terms.
| What it is | Future card sales sold at a discount; not a loan |
|---|---|
| Priced with | A factor rate, not an interest rate |
| Collected by | A holdback share of sales, or fixed debits |
| Finished when | The full agreed amount is remitted |
| Key number | The total remittance in dollars |
| Who decides | The funder |
Merchant cash advance, defined
A merchant cash advance is not a loan. The funder pays an amount now and, in return, buys the right to a larger amount of the business's future card sales or deposits. It collects that amount over time until the agreed total has been remitted. There is no interest rate and, in most agreements, no fixed end date.
Factor rate and total remittance
Funders price advances with a factor rate. Multiply the advance by the factor to get the total the funder will collect. This is the factor rate formula in its whole form: advance × factor = total remittance, and total remittance − advance = cost.
A hypothetical example, not an offer or a typical price: an advance of $15,000 with a factor written as 1.35 means the funder collects $20,250, so the cost is $5,250. Fees deducted at funding would reduce the $15,000 you actually receive, which makes the cost higher relative to the cash in hand.
Because the total is fixed and the collection period is not, the same advance can have a very different annualized cost depending on how fast it is collected. A short collection period makes the effective cost higher, not lower. Compare the dollar total with what a loan option would cost in total.
Holdback percentages and fixed debits
The holdback is the percentage of each day's card sales or deposits that the funder takes until the total is collected. With a hypothetical holdback of 12 percent, a day with $1,500 in card sales sends $180 to the funder. Busy days remit more and slow days remit less, so the collection period stretches or shrinks with sales.
Some agreements skip the percentage and take a fixed daily or weekly debit instead. A fixed debit does not fall when sales fall, unless the agreement includes a reconciliation process that adjusts it to actual receipts.
Reconciliation, stacking and renewals
Reconciliation is the process some agreements offer to adjust fixed debits to what the business actually took in. Ask whether it exists, how to request it and how often.
Stacking is accepting another advance before the first one is fully collected. Each funder takes its own share, and the combined daily pull can strain the account quickly. Renewal offers made partway through collection may pay off the old balance from the new advance; ask how much of the new money you would actually receive.
When an advance might be considered
Advances are usually considered by businesses with steady card or deposit flow, such as restaurants and shops, that need money quickly and do not fit a loan partner's requirements. St. Louis County had 421 food service and drinking place establishments and 773 retail establishments with employees in 2023 (U.S. Census Bureau, County Business Patterns 2023); many of them take most payments by card. Card volume alone does not make an advance a good idea. If a working capital loan or credit line is available, compare its total cost with the total remittance first.
What to ask any funder
- What is the total remittance in dollars?
- Will collection be a share of sales or a set debit, and on which days?
- What fees come out of the advance before I receive it?
- Is there a reconciliation process, and how do I use it?
- What happens if sales drop or the business closes?
- Will a UCC filing be made against the business?
Funders often file a UCC financing statement on receivables. The Minnesota UCC search guide explains how to see existing filings, and how a request moves covers how to compare an advance offer with a loan offer.
By Lakeshire Business Funding · Updated
