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The provider is buying card receipts the business has not yet taken in. The factor fixes the total to be collected at signing, and the holdback share sets the daily pace of collection. Providers set both terms.
At a glance
- What it is
A sale of future card receipts
- Cost set by
The factor, fixed at signing
- Collected
A share of each day's card sales
How does a merchant cash advance work? An Adrian, MI carryout restaurant's daily holdbacks, start to finish
A provider pays the business a sum and buys a slice of its card sales until a fixed total has been collected. For an Adrian, MI carryout restaurant, the sequence looks like this:
- An offer arrives listing the advance amount, the factor and the percentage of card sales to be held back.
- Once the carryout signs, the provider deposits the advance.
- From the next business day on, the provider takes its percentage out of every card settlement.
- Collection stops once the total in the agreement has been remitted.
Illustration only, invented figures: with $12,800 advanced at a 1.29 factor, the carryout has sold $16,512.00 of future receipts. With an 11% holdback on card sales of $1,560 a day, $171.60 goes out each day, and the total is remitted in 97 business days, rounding up the last partial day.
Working backward to the factor: a Lenawee County, MI shoe store reading its offer
Divide the contract's collection total by the cash advanced and the result is the factor. Some offers print the factor and some print only the two dollar amounts, so the division is worth doing either way.
Illustration only, invented figures. A Lenawee County, MI shoe store is offered $9,400 now against $12,032 to be collected from its card sales. Dividing $12,032 by $9,400 gives a 1.28 factor. The cost is the difference, $2,632, or 28% of the advance, and that cost stays the same however many days the collection takes.
An Adrian, MI hair salon's product order priced two ways: a card-sales advance or a credit line draw
Illustration only, invented figures. An Adrian, MI hair salon needs $6,500 for a large product order and a dryer repair. An advance at a 1.24 factor with a 10% holdback on $900 of daily card sales means $8,060 collected at $90 a day over 90 business days, a cost of $1,560.
A line of credit draw of the same invented $6,500 at 13.6% a year, paid down in equal weekly amounts over the same 18 weeks, would carry about $161.05 in interest, before any draw or annual fee the line charges.
The line costs less in this example, but a line needs its own approval and limit, and a salon without one may weigh the advance's cost against the order it pays for.
What is a factor rate in an MCA? One 1.26 factor at three levels of card sales for an Adrian, MI sit-down restaurant
A factor rate is fixed when the agreement is signed. Card sales change only how many days collection takes, not the dollar cost. Take a $14,200 advance for an Adrian, MI sit-down restaurant at a 1.26 factor and an 8.5% holdback (illustration only, invented figures):
| Daily card sales | Collected per day | Business days | Cost of the advance |
|---|---|---|---|
| $1,900 | $161.50 | 111 | $3,692.00 |
| $2,400 | $204.00 | 88 | $3,692.00 |
| $2,900 | $246.50 | 73 | $3,692.00 |
Because the cost stays put while the days change, an advance that finishes sooner costs more per day the money is out.
What a Lenawee County, MI florist sells when it takes a merchant cash advance
A merchant cash advance is not a loan: the florist sells part of its future card receipts at a discount. That changes how the deal is put together:
- The provider is buying receipts, so the contract speaks of a purchase price and a total to be remitted rather than principal and interest.
- The holdback is a share of card sales, so a day with fewer sales sends less money.
- The factor is applied once to the full advance, with no interest running on a balance.
- A provider may still ask for a personal guarantee or a lien, and the contract spells out what happens if card processing moves elsewhere.
A term loan, by contrast, has a rate, a schedule of payments and a fixed end date.
Two advances running at once: what a Lenawee County, MI bakery keeps per day
Illustration only, invented figures. A Lenawee County, MI bakery still has $4,100 left on a first advance, collected at 10% of $1,300 in daily card sales, or $130 a day. A second provider offers $6,000 at a 1.3 factor, $7,800 to be collected at an 8% holdback, $104 a day.
- Combined holdback while both invented advances run: 18% of card sales, $234 a day
- Left for the bakery from $1,300 of card sales: $1,066 a day
- First advance finished after 32 business days; the second alone after 75
The first agreement may limit or bar a second advance, so it is the place to check before signing another.
By Valeshire Financial ยท Updated
