A merchant cash advance is a purchase of a business's future receipts: a funder pays a lump sum now and collects a fixed total through a holdback on sales or scheduled debits. It is not a loan. Ravenside Lending, a small-business funding broker in Macon, GA, explains holdbacks, reconciliation, stacking and default terms and compares advances with loans for Middle Georgia owners.
| What it is | A purchase of future receivables; a merchant cash advance is not a loan |
|---|---|
| How it is collected | A share of daily sales, or a set debit each business day or week |
| How cost is stated | A factor times the advance equals the total you remit |
| Clauses to read | Reconciliation, stacking limits, default triggers, owner guarantee |
| Who decides | The funder alone prices it and sets the terms |
Legally speaking, is a merchant cash advance a loan?
No. A merchant cash advance is not a loan. The funder buys a fixed amount of your future receipts, usually called the purchased amount, and pays you a smaller lump sum for it now. You then remit the purchased amount out of your sales until it has been delivered. Because the contract is written as a sale, it speaks of remittances, receivables and a purchase price rather than interest, principal and repayment.
Holdback percentages, explained
The holdback is the share of each day's card sales or deposits that goes to the funder. When sales are slow, less is remitted; when they are strong, more. A holdback contract adjusts automatically to sales, which is its main advantage over fixed payments.
Some advances instead debit a fixed amount from your bank account every business day or every week. The amount is sized from an estimate of your sales, and the contract usually includes a reconciliation clause.
Reconciliation when sales fall
Under a reconciliation clause, you may ask the funder to adjust a fixed debit to match the agreed percentage of your actual receipts if sales drop. The process, the records required and how quickly any change takes effect vary from contract to contract. If the clause is vague or hard to use, a fixed-debit advance behaves much like a fixed payment whatever happens to your sales.
A merchant cash advance example, without the sales pitch
Here is the arithmetic, in letters rather than numbers so nobody mistakes it for a quote. Suppose a funder pays an advance of A and buys a purchased amount of B. The factor is B divided by A. The cost of the advance is B minus A, plus any fees deducted from the advance. If the holdback is h percent and daily card sales average S, the funder collects about h percent of S each day, so delivery takes about B divided by that daily amount, in business days.
The factor is not an interest rate. The faster the purchased amount is delivered, the more expensive the advance is when measured over a year. Always ask for three figures in writing: the amount you will actually receive after fees, the total you will remit, and the estimated daily or weekly remittance.
Stacking, default triggers and owner guarantees
Stacking is signing a second advance before the first has been fully remitted. Many contracts prohibit it, and two sets of daily debits can drain a business's cash quickly. Default triggers vary, but commonly include changing the account the funder debits, blocking debits, or closing or selling the business without notice. Many advances include a personal guarantee of the owner's performance under the agreement.
Many funders record a UCC financing statement against receivables. The Georgia UCC search guide shows how to check what has been filed against your business.
What happens if you default on a merchant cash advance in Georgia?
What follows a default depends on the contract. Agreements may allow the funder to demand the full remaining purchased amount, pursue the personal guarantee or act on its UCC filing. If you expect trouble remitting, contact the funder early and ask about reconciliation before missing debits.
When an advance fits, and when a loan may be better
Advances are generally used by businesses with steady card sales and a short-term need, such as restaurants and retailers. They are rarely the cheapest option. Compare any offer with working capital financing and lines of credit before you sign. The industry pages describe sector patterns, the Macon, GA page has local context, and the four steps explain how we compare offers.
By Ravenside Lending ยท Updated
