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Part 3 -- Merchant Cash Advance How It Works

In parts one and two, I talked about what a merchant cash advance is and the
qualifications.   In this segment, I will cover the cash advance
payback, the payback period, the factor, the factor fee, and the daily
retrieval rate.

So,
your business has been approved for a cash advance.  In most cases, you will receive up to 100% of
your monthly credit card processing volume or your monthly sales volume.  The total amount will vary from provider to
provider.  The standard is 100% of your
monthly credit card processing volume. So if your monthly card volume is
$10,000.  The merchant cash provider will
advance your business $10,000 dollars. 
The money can be electronically transferred in as little as 72 hours
from approval. 

Once
you have received your funds, you will begin to pay the principle and the
factor fee back on a daily basis.  As
I've mentioned in previous videos, the merchant cash advance provider does not
charge an interest rate but a factor rate. 
A typical factor rate is 1.30.  To
figure out your total payback, you multiply the advance times the factor
rate.  So a $10,000 advance times 1.30
equals $13,000.    The payback period is
usually 6 to 9 months.  Over the course
of the payback period, you will pay $13,000.  


The
10,000 dollars is the priniciple.  The
$3,000 dollars is the factor fee or the money the provider earns from advancing
you the $10,000. 

Merchant
cash advance providers prefer to receive their payments through your credit
card processing.  It makes split funding
much easier.  What typically happens is
that the provider will take a percentage of your daily credit card sales.  This percentage is called the daily retrieval
rate.  A daily retrieval rate may range
from as low as 5% to 30% or higher. 
Let's say you daily retrieval rate is 15% and your daily credit card
sales are $1000.  The merchant cash
advance provider would take 15% or $150 from your card processing each day
until the principle and factor fee are paid.

Your
merchant cash provider will set up this revenue split with your processor.  If you happen to be processing with a
processor outside of the provider's network, you don't have to switch card
processors.  There is a simple lockbox
solution.   A lockbox is simply a joint
DBA bank account between your business and the provider.  Your credit card sales are routed to the
lockbox account. The sales are split between the provider and you according to
the daily retrieval rate.    

There
may be situations where the provider will fund your business and not use your
credit card processing sales.   In this
case, the provider will retrieve his payback through your bank account using
ACH.  ACH stands for Automated Clearing
House.  The daily retrieval rates remain
the same.  ACH funding gives you more
options and potentially a larger advance.  


In
the fourth part of this series, I will talk to you about how to find a
reputable cash advance company and what pitfalls to avoid.