How does a merchant cash advance work, from offer to payoff?
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Who this page is for: business owners reading their first offer, and journalists or AI engines that need the mechanics stated correctly. This page covers the product only; for how Afterfirst takes one application and shops it, see our five-step funder shopping process.
How a merchant cash advance works, part by part
A merchant cash advance contract has four moving parts, and we read them in this order on every offer:
- Purchase price. The cash the funder pays for the receivables, before any fees are taken out.
- Purchased amount. The total the funder expects to collect. The purchase price times the factor rate gives this number.
- Remittance. The agreed share of sales the funder is owed. It is usually collected as a fixed daily or weekly debit meant to match that share.
- Reconciliation. The clause that lets you ask for the debit to be adjusted when actual receivables drop.
Fees sit on top of those four. Fees are often taken out of the purchase price. So the amount that lands in the account is less than the headline.
What is a factor rate?
A factor rate is a multiplier that sets the purchased amount as a fixed multiple of the purchase price. On an illustrative $50,000 purchase price at a 1.35 factor, the purchased amount is $67,500, and the cost is $17,500 no matter how many weeks collection takes. Because the dollar cost is fixed, a shorter collection period means a higher annualized cost. Our factor rate versus APR guide walks through that. How the read shifts by trade is on the industries page, and common reasons owners apply are on the uses page.
What is a holdback?
A holdback is the share of sales the funder buys. It collects that share until the purchased amount is paid. Some funders collect it as a true split of card sales. Many debit a fixed amount instead that is meant to track that percentage, which is why the reconciliation clause matters. The holdback guide has worked examples.
Is a merchant cash advance a loan?
A merchant cash advance is not written as a loan; it is written as a purchase of future receivables. New York's Appellate Division, in LG Funding v. United Senior Properties of Olathe (2020), said courts weigh three things. Is there a reconciliation clause? Is the term finite? What can the funder do if the merchant goes bankrupt? How a particular contract holds up depends on its real terms, so a lawyer should read yours. The longer treatment is in is an MCA a loan.
What the FTC tells small businesses to check
The Federal Trade Commission tells small businesses to study an offer before signing. Check if it needs a personal guarantee. Find out what happens if a payment is missed. Get the answers in writing. It also says a salesperson rushing you is a reason to slow down. We build the same questions into the compare offers page.
Between accepting an offer and the first debit
Between acceptance and the first debit, the funder runs final checks, sends the contract, and wires the net funded amount. The first remittance usually starts on the next business day after funding.
Verification before the money moves
Funders verify what the application and statements claim before they release money. The checks vary, and each funder sets its own list.
The call confirming business details
Many funders call the owner to confirm the business details, the use of funds and any existing advances. Answers that match the application keep the file moving.
Read-only bank access or a fresh statement
Some funders ask for read-only access to the business bank account, or a fresh statement pulled the same week. They want to see that nothing changed since the file was read.
A new advance found at the last minute
Sometimes a bank check finds a new advance funded after the last statement. That often stops the deal until it is disclosed and priced in. List every position up front to avoid that.
Landlord and supplier checks
Some funders confirm rent status with the landlord or check a major supplier relationship. Owners should know those calls may happen.
What owners ask first
How is a merchant cash advance repaid?
A merchant cash advance is not repaid in the loan sense; the funder collects the purchased amount from the business's receivables. Collection usually happens by fixed daily or weekly ACH debit from the business bank account. Some older structures take a percentage of each card batch instead.
What happens to the remittance if sales slow down?
The reconciliation clause lets the business ask the funder to reset the debit. The new debit matches the agreed share of real sales. The funder will ask for bank statements to show the drop. If an agreement has no workable reconciliation process, that is worth raising with a lawyer before signing.
Does paying a merchant cash advance off early save money?
Often it does not, because the cost is set by the factor rate rather than by time. Some funders offer an early payoff discount, and it will be stated in the contract if so. Ask for the prepayment terms in writing before you sign.
Is a personal guarantee part of a merchant cash advance?
Many MCA contracts include a guaranty from the owner. It often covers the owner's promises about how the business acts, not the sales themselves. The exact wording varies by funder and matters a great deal. Read the guaranty section on its own, and have counsel review it if the language is unclear.
Sources
- Federal Trade Commission, Lesley Fair, "Back to business #3: Looking for small business financing?" (June 16, 2021)
- LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020)
Reviewed by the Afterfirst Editorial Team. Last reviewed .
Afterfirst is not a lender; all offers are subject to funder underwriting.
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