In a typical cash advance, merchants receive a lump-sum payment of one to four times their average monthly card volume. The provider and merchant agree on a percentage of daily card sales or a fixed daily payment that will be collected from the merchant as repayment for the advance.
Usually, cash advance providers require merchants to have a minimum monthly card volume of $5,000 a month, a good standing with their landlord, and no unresolved bankruptcies. There is minimal documentation required, typically consisting of processing statements, bank statements and a copy of the property lease or mortgage statement. Bottom line, a cash advance requires substantially less documentation than a loan or credit line application.
Remittances are made in various ways, depending on the provider. Here’s a breakdown of how the three methods work:
Split Funding: With split funding the merchant authorizes its processor to forward the agreed amount of the merchant’s daily settlement dollars to the provider’s account and remit the balance to the merchant’s account. Split funding is the preferred structure because it takes less time and is less risky. It offers the most convenient option for merchants, since it makes it easier for the merchant to manage its payback activity.
Escrow Account: Daily settlement amounts are deposited by the processor and the provider debits the agreed upon percentage from the escrow account as an Automated Clearing House (ACH) transaction. Thereafter, the remaining funds are transferred to the merchant’s account. This causes a delay in receipt of the funds (typically a day). Additionally, the merchant has less control over its funds, since a third party is given access to all the funds to debit the amount before they are released to the merchant.
Direct Debit: The merchant cash advance company directly debits the daily payment – based on the agreed-upon percentage – from the merchant’s bank account through ACH. This also means less control to the merchant, and ACH debits frequently cause the merchant to overdraft.
Now that we've explained how merchant cash advances typically work, next time we'll look at things to consider when selecting a merchant cash advance provider.