My Merchant Account Blog

Merchant Accounts and Cash Advances

Friday, September 07, 2007

By now, you probably have seen a few companies offering you an advance on your credit card processing volume.  Some companies might not be eligible for this cash advance based on their volume, time processing with their merchant account provider, or services that they offer.

Merchant Cash Advance

This service is known as a Merchant Cash Advance (MCA) and involves the purchase of the portion of a business' future card sales at a discount.  The purchase price paid by an Merchant Cash Advance provider is a lump sum of cash delivered to the business for its use as working capital:

• Advertising
• Equipment
• Renovations
• Equipment
• Expansion
• Inventory
• Taxes
• Working Capital
• Emergencies

A Merchant Cash Advance is not a loan - it is the purchase of specified amount of card sales (that has yet to come).  The Merchant Cash Advance provider usually contracts with a Merchant Account Provider to collect the purchased sales.  This means that the dollar amount received by the Merchant Cash Advance provider on a given processing day is based on the merchant's net card sales volume (post-chargebacks, reserves, and other processors related charges.

Merchant Cash Advance Provider

Usually the the Merchant Cash Advance Provider will contract with the Merchant Account Provider to receive payments from the merchant.  Some of the more popular and well known merchant cash advance companies include top providers like: AdvantageMCA, CitiWide and MCA Merchant Advance Company. One way is known as Automated Clearing House (ACH) and another is "batch-splitting". 

In the ACH method, debits in the amount equal to the agreed percentage of the covered card sales are instituted by the processor from the merchant's bank account (i.e. Demand Deposit Account (DDA)) though ACH transactions.  In the batch-splitting method, the merchant allows the Merchant Account Provider to forward the agreed upon percentage directly to the Merchant Cash Advance Provider's account.  The rest of the money is then deposited into the merchant's bank account.

Pros and Cons Using a Merchant Cash Advance

Since the re-payment plan is based on a percentage of the future sales, the Merchant Cash Advance Provider will receive their money usually on a daily basis.  However, if you have to pay more than your "Safe Retrieval Percentage", you run the risk of going out of business.  For example, if your agreed upon retrieval percentage rate is 10%, you should make sure your mark-up is higher than this rate to cover this additional expense.

Merchant Cash Advance Providers usually require less paperwork than traditional capital sources and can often go from the application to completed funding in a week or less.  Some Merchant Cash Advance Providers do not require personal collateral to secure the merchant's obligations. 

Some Merchant Cash Advance Providers will also require the merchant not to switch Merchant Account Providers and other terms.  They will usually require the merchants to provider guarantees of performance as well.

Retrieval Fee Changes

Most Merchant Account Providers have a relationship with a Merchant Cash Advance Provider.  Usually it is better to do business with these companies since this industry is still growing and is self-regulated.  Some Merchant Cash Advance Providers might increase the retrieval percentage without the merchant's expressed consent if the merchant's sales slow down and the Merchant Cash Advance Provider is not getting their money back in a timely manner (if your sales slow down).  Verify with the Merchant Account Provider what their regulations are when it comes to this as well as the Merchant Cash Advance Provider.

Comments

Horace said...

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1/9/2010

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