Merchant cash advance


Merchant cash advance

A Merchant Cash Advance is a lump sum payment to a business in exchange for an agreed upon percentage of future credit card and/or debit card sales.[1] Merchant Cash Advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit- and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with card-payment processors and take payments directly from a business owner's card-swipe terminal.[2]

Merchant cash advance companies are most often used by retail businesses that do not qualify for regular bank loans. A business cash advance can be expensive compared with interest on a bank loan, ranging from 10% to 100% effective interest.[3] Merchant cash advances are not loans - they are a sale of a portion of future credit and/or debit card sales. Therefore merchant cash advance companies claim that they are not bound by usury laws that would limit interest rates.[4]

Despite the cost of merchant cash advances, the structure has many advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant's sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Additionally, the ease, simplicity and speed of the application process, as well as the lower security position (i.e. behind that of the bank and landlord) associated with merchant cash advances are significant advantages.{ An example transaction is as follows: A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 5-10%) from every credit card and/or debit card sale until the entire $25,000 is collected.

There are generally three different repayment methods for the business[citation needed]:

  • Split Withholding: When the credit card processing company automatically splits the credit card sales between the business and the finance company per the agreed portion (generally 10% to 22%). This is generally the most common and preferred method of collecting funds for both the clients and finance companies since it is seamless.
  • Lock Box or Trust Bank Account Withholding: All of the business's credit card sales are deposited into bank account controlled by the finance company and then the agreed upon portion is forwarded onto the business via ACH, EFT or wire. This is the least preferred method since it results in a one-day delay in the business receiving the proceeds of their credit card sales.
  • ACH Withholding: When the finance company receives the credit card processing information and deducts its portion directly from the business's checking account via ACH.

Criticism

Critics[who?] claim merchant cash advance providers are actually lenders evading usury laws.

References


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • James Cash Penney — Infobox actor bgcolour = name = James Cash Penney birthdate = birth date|1875|9|16 location = Hamilton, Missouri, United States deathdate = February 12, 1971 (age 95)James Cash Penney (born September 16, 1875 in Hamilton, Missouri, USA ndash;… …   Wikipedia

  • Ibank — Infobox Company name = iBank type = genre = foundation = 1999 founder = Tom Markel location city = Costa Mesa, California location country = U.S. location = locations = area served = U.S. Norman, Jan. Money: iBank Seeks to Connect Small Business… …   Wikipedia

  • Credit card — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Empl …   Wikipedia

  • Debit card — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Empl …   Wikipedia

  • Factoring (finance) — This article is about finance. For other uses, see Factor (disambiguation). Corporate finance …   Wikipedia

  • Overdraft — I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and I I withdraw my overdraft! Cartoon from Punch Magazine Vol. 152, June 27, 1917 An overdraft occurs when money is withdrawn from a bank account and the… …   Wikipedia

  • Payday loan — A shop window in Falls Church, Virginia advertises payday loans. A payday loan (also called a paycheck advance) is a small, short term loan that is intended to cover a borrower s expenses until his or her next payday. The loans are also sometimes …   Wikipedia

  • Nochex — Based in the United Kingdom, Nochex is a private company with twenty four employees that provides online payment services.[1] Nochex caters primarily to small and medium sized businesses. Contents 1 Account types 2 On line shopping carts and… …   Wikipedia

  • Dundee — For other uses, see Dundee (disambiguation). Coordinates: 56°27′50″N 2°58′12″W / 56.464°N 2.970°W / 56.464; 2.970 …   Wikipedia

  • Electronic funds transfer — or EFT refers to the computer based systems used to perform financial transactions electronically.The term is used for a number of different concepts: * Cardholder initiated transactions, where a cardholder makes use of a payment card * Direct… …   Wikipedia