A merchant cash advance is not a loan: a funder buys a portion of a business's future receipts for a lump sum and collects them through a holdback on sales or fixed debits until the agreed total is remitted. Graniteford Finance, a small-business funding broker in Casper, WY, helps Natrona County owners understand the total cost and compare loan options before they sign.
| What it is | A purchase of future receipts. It is not a loan |
|---|---|
| How it is collected | A set share of daily receipts, or a fixed debit each day or week |
| Cost shown as | A factor rate applied to the amount advanced, not an interest rate |
| Check first | Total payback, fees, reconciliation, stacking and default clauses |
| Who sets terms | The funder, never Graniteford Finance |
| Office | 106 S Wisconsin Ave, Casper, WY 82609, (307) 368-2297 |
What a merchant cash advance is
With a merchant cash advance, a funder pays your business a lump sum and, in return, buys a specified amount of the business's future receipts. A merchant cash advance is not a loan, so the agreement does not describe repayment of borrowed money with interest; it describes receipts that are remitted to the funder until the purchased amount has been collected.
Advances are most often offered to businesses with steady card sales, such as restaurants and shops, because the funder collects from those receipts. Some funders collect from bank deposits instead.
How the total payback is set
The cost of an advance is fixed at signing with a factor rate, a multiplier written as a decimal. The amount advanced multiplied by the factor rate gives the total the funder will collect. The part of the factor above 1 is the cost per dollar advanced. Fees deducted at funding reduce what actually reaches your account, so the cost per dollar received is higher than the factor suggests.
- Total to be remitted = amount advanced × factor rate
- Dollar cost = total to be remitted − amount advanced
- Cost per dollar actually received = dollar cost plus fees, divided by the net amount deposited
A factor rate is not an annual interest rate. Because an advance may be collected over a few months, the same factor rate can mean a much higher yearly cost than a loan's stated rate. Compare advances and loans in total dollars over a similar period, not by the headline number.
Holdbacks and fixed debits
The holdback percentage is the share of each day's card or deposit receipts that goes to the funder. With a percentage holdback, remittances rise in strong weeks and fall in slow ones. Many advances instead use a fixed daily or weekly debit from the bank account, sized from an estimate of your receipts. A fixed debit is easier to plan around but does not shrink automatically when sales fall.
If you already hold an advance and want to see what is left on it, the MCA payoff balance estimator works out the purchased amount, and its page shows how to subtract what has been remitted.
Reconciliation
Many agreements that use fixed debits include a reconciliation clause: if your actual receipts fall, you can ask the funder to adjust the debits to reflect the agreed percentage of real sales. The conditions vary: how to ask, what records to send, and how often adjustments are allowed. Read that clause before signing, and keep the records it requires.
Stacking and existing advances
Taking a second advance while the first is still being collected is called stacking. Each new advance adds its own daily or weekly remittance on top of the last, which can quickly absorb a large share of revenue. Many agreements prohibit additional advances without the first funder's consent. Loan and MCA stacking explained covers why funders ask about it and what to check.
Funders often file a UCC financing statement covering receivables. That filing appears in a Wyoming UCC search and is one way other funders learn an advance exists.
Who an advance can suit, and who it rarely does
An advance is built around sales that arrive every day, so it is most often offered to card-heavy businesses. It can suit an owner who needs money quickly for a short, specific purpose, has compared the total cost against loan options, and can absorb the remittance in a slow week. It rarely suits a business that is already short every month, one carrying another advance, or a need that will last longer than the collection period. In those cases the remittance tends to deepen the problem it was meant to solve.
Before you accept an advance
- Write down the amount advanced, the factor rate, every fee and the net deposit.
- Calculate the total to be remitted in dollars.
- Estimate how long collection will take at your real sales, and what the remittance does to a slow week.
- Read the reconciliation, default, stacking and personal guarantee clauses.
- Compare the same need priced as working capital or a line of credit.
If an advance is the right answer after that, you will have chosen it knowing the full cost. If not, you have lost nothing by checking.
By Graniteford Finance ยท Updated