A boutique or restaurant in Paducah, KY that takes a merchant cash advance receives a lump sum today and hands over a fixed dollar amount of its future card sales. It is not a loan, so it carries no interest rate and no monthly installment. The provider collects an agreed percentage of each card batch until that fixed amount is reached, so a lower-sales week sends less, while the total cost stays the same.
With a merchant cash advance, a provider pays a lump sum today and takes a share of the business’s future card sales. The provider collects a set percentage of card batches until a fixed payback amount is reached. It is not a loan, and its cost is set on the first day; installment credit suits long-lived purchases and steady costs.
Buying a share of future card sales
In legal terms, a merchant cash advance is the sale of a slice of future receivables. The provider pays the business a sum today and buys a set dollar amount of the card sales the business has not made yet. It is not a loan. The contract names three numbers: the amount paid to the business, the amount the provider buys back from future sales, and the percentage of each card batch the provider collects until that amount is reached.
Because collection rides on card volume, this kind of funding fits counters where customers pay by card every day: a clothing boutique, a sit-down restaurant, a coffee bar, a salon. A shop whose income arrives as checks or invoices has little for a card-share provider to collect from.
ZIP Code Business Patterns counted 240 retail trade establishments and 150 accommodation and food services establishments at ZIP 42001 addresses for 2023. In the food and lodging group, 19.3% had fewer than five employees, so about four in five had five or more people on payroll. Both are ZIP 42001 counts by business address.
Holdback percentages and remittance
The holdback is the percentage of card sales sent to the provider. It can be collected in two ways, and the contract says which. In a split arrangement the card processor sends the provider its share of each settled batch before the rest reaches the business account. In a debit arrangement the provider draws a set amount from the bank account each business day or week, based on estimated sales, and the contract can allow that amount to be reconciled against actual card sales.
Illustration only, invented figures: a Paducah, KY boutique takes a $24,000 card-sales advance with an 11% holdback. In this example, a week of $8,500 in card sales sends $935.00 to the provider, and a week of $5,600 sends $616.00. In this example, the remittance shrinks with the sales, which is the point of the product.
At the higher weekly level, the provider reaches the purchased amount in about 34 weeks in this example; at the lower one, it takes about 52 weeks in this example. Either way the business sends the same total.
The total payback figure
The total payback is the advance times the factor rate. In this example a $24,000 advance with a 1.32 factor rate sets the payback at $31,680, so the cost of the money is $7,680 in this example. That figure is fixed on the first day. Nothing is added if collection takes longer, and nothing comes off if card sales climb, unless the contract offers a discount for settling early.
A fixed dollar cost hides how the price changes with time. The same cost collected over a shorter span works out to a higher annualized rate, because the provider has its money back sooner. The advance cost calculator on this site turns an offer’s amount, factor rate and expected collection period into an annual percentage, so two offers can be compared on the same footing.
- The amount paid to the business, after any amount kept back at signing
- The factor rate and the total payback in dollars
- The holdback percentage, or the fixed debit and how it is reconciled
- Whether settling early lowers the payback
- What the contract says about taking a second advance before the first is collected
When installment credit fits the job instead
Card-share funding solves a timing problem. It is a poor match for a cost the business carries for years. A walk-in cooler, a point-of-sale system or a full set of dining chairs lasts long after an advance is collected, and an installment note spreads that cost over the useful life with a payment the owner can plan around. For a short gap between paying staff and collecting income, a business line of credit bills interest only on what is drawn.
Illustration only, invented figures: put the same $24,000 on a 12-month term loan priced at 15% a year and, in this example, twelve installments of $2,166.20 sum to $25,994.40. In this example, interest comes to $1,994.40, less than the $7,680 card-sales cost. In this example the installment is the same in a strong month and a weak one, while the holdback moves with sales.
Owners who want to compare a term note, a line and a card-sales offer side by side can start with working capital funding options or the merchant cash advance page, then call (270) 236-8708 or use the request form. Every other article for local owners is on the blog.
By Lindenspring Business Loans · Updated
