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:

• Batch out sales from your credit card machine at the end of each day.
• Your processor receives your batch info electronically.
• A couple days later, the processor sends the funds directly to your bank account.  (They might take fees out of each batch or they might take them once per month.)

In a cash advance scenario, a lender is going to be taking percentages of your daily credit card sales.  How do they do that?

Let’s use an example:

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:

• Batch out sales from your credit card machine at the end of each day.
• Your processor receives your batch info electronically.
• A couple days later, the processor sends the lender 20% of your batch funds directly to their bank account and 80% directly to your bank account.  (They might take fees out of your portion of each batch or they might take them once per month.)

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”.