Posted in Trust Business Loans News & Information on September 12, 2011
Put simply, a Merchant Cash Advance is the sale of future credit card sales for cash today. But how does that really work?
If you’re a business owner, you already process credit card sales everyday. You’re accustomed to the following daily routine:
In a cash advance scenario, a lender is going to be taking percentages of your daily credit card sales. How do they do that?
A lender is going to purchase $13,000.00 of your future credit card sales for $10,000.00 cash today. Both you and the lender agree that the lender will be taking 20% of your future credit card sales until you pay in full the $13,000.00. The lender then wires you $10,000.00 and you’re on your way, right?
For this to work, your credit card processor must have capability for what we call “split funding” or “holdback“. This means your credit card processor must have the means with which to take your daily batches, split them up into 80% and 20%, and then send 80% to you and 20% to the lender. So, let’s look at that earlier scenario with the new twist:
So now, the lender is receiving 20% of your daily credit card sales directly to their bank account. They receive these funds directly from your processor. It is up to both you and the lender to monitor your daily 20% payments until they reach $13,000.00, at which time the lender will no longer collect split funding. (You should check your account regularly and request statements.)
In this scenario, we in the industry would refer to the “holdback” amount being 20%. We also use the term “split”. ”The split is 20%”. This is the amount that is “held back” or “split off” from each of your daily batches and given to the lender.
But what happens if your credit card processor doesn’t offer “split funding”? In the next post, we’ll review the world of “lockbox”.
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