Merchant Cash Advance

A merchant cash advance is not a loan. A funder buys a fixed slice of your future revenue — say $65,000 of it — for a smaller sum today, say $50,000. You repay by handing over that revenue as it arrives, either as a fixed daily or weekly debit from your business account or as a percentage of your card settlement.

That structure is the whole reason the product exists. Because it is a purchase rather than a loan, there is no interest rate and no state usury cap. Because it is underwritten on your bank deposits rather than your credit file or your collateral, it reaches businesses a bank will not touch: under two years trading, a score in the 500s, nothing to pledge, uneven income.

It is also why it costs more than any loan you would qualify for. You are paying for speed and access. Understanding that trade is most of what there is to understand.

Two structures, and the difference matters more than the price. A fixed ACH takes the same dollar amount every business day or every week whatever you sold that week. A true holdback takes a percentage of card sales, so it shrinks on a slow day and grows on a good one.

Most advances written today are fixed ACH with a reconciliation clause bolted on — a right to ask for the debit to be adjusted if revenue falls. Whether that clause says the funder "shall" adjust on evidence or merely "may" consider it is the single most important sentence in the agreement, and the one to read before the factor rate.

Weekly is easier on cash flow than daily for any business whose money arrives in lumps, and it is often available simply by asking before you sign.

The price is a factor rate, not an interest rate. At 1.30, you repay 1.3 times what you received: $50,000 in, $65,000 back, $15,000 cost. The factor is fixed at signing, so the cost does not fall if you repay early and does not rise if you take longer — unlike interest.

Typical factors run 1.1 to 1.5. Where you land inside that band depends on deposit consistency, time in business and whether you already carry another advance — not on your credit score. On $50,000, the gap between 1.25 and 1.40 is $7,500, which is why the first offer is rarely the one to take.

Compare offers by total dollars repaid and the term over which you repay them. A daily payment quoted alone, or a rate quoted alone, tells you nothing.

It makes sense when the money is for something that produces cash inside the term: stock for a season, materials for a job that has not paid yet, payroll during a gap between a draw and its release, a supplier discount larger than the cost of the advance. Self-liquidating uses are where the product is honest value.

It does not make sense for equipment, premises, or anything that pays back over years — those have their own, cheaper products. And it does not make sense to service another advance. Stacking is the most reliable way small businesses in this market fail.

If you could pass a bank's underwriting and can wait three weeks, take the bank loan. The advance exists for when neither of those is true.

With a true holdback the payment falls on its own, because it is a share of what you sold. With a fixed debit it does not fall at all unless you invoke reconciliation — and whether the funder must grant it or merely may is what you should have checked before signing.

Contact the funder before a debit fails, not after. A missed ACH is a defined event of default in most agreements; an early conversation almost never is. Ask for a reduced debit for a defined period, with statements showing the decline.

The balance is usually accelerated in full, the personal guarantee is called, and any UCC filing on your business assets can be enforced. If you signed a confession of judgment, a judgment can be entered without you being heard — often discovered when an account is frozen.

Almost all of that is avoidable by calling before a payment is missed. Funders settle, and they settle better while there is still a trading business to settle with.

The reconciliation clause, first. Then whether the agreement contains a confession of judgment — many funders will write the deal without one, and asking tells you a great deal about who you are dealing with. Then the governing law, which decides where you can be sued.

Then the UCC filing: a specific one on the financed asset, or a blanket one over everything the business owns. A blanket filing in first position can stop any other funder lending to you until it is terminated.

In a dozen states the funder must now hand you a standardised disclosure of these terms before you sign. Ask for it anywhere.