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Merchant Cash Advance Repayment Options

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mca payment options

Many small business owners utilize merchant cash advances as a financial tool when they need quick access to cash. With a merchant cash advance, you pledge a percentage of future credit and debit card sales to the lender. In turn, the lender advances money against those sales.

Because a lender primarily looks at your business’s credit card sales volume when approving the advance, it’s an easy and fast way to get funds. But what about repaying those funds? The flip side of borrowing is paying back the advance, so before you take out a MCA make sure you understand how it’ll be repaid.

Merchant Cash Advances and Repayment Terms

One of the reasons many small business owners choose MCAs to meet their funding needs is that they have extremely flexible repayment terms. Unlike a traditional small business loan, businesses don’t have to pay a fixed amount of specific dates. In other words, you won’t have a lump sum payment of $400 due on the 15th of every month. 

Merchant cash advances are repaid depending on credit and debit card sales. The lender takes a percentage of each card you swipe, either daily or weekly. Repayment matches your cash flow – in a slower week, you’ll make a smaller payment on the advance.

For many small business owners, flexible payments that match your cash flows can be a big help. In slow months, it could be a struggle to cover a lump sum, monthly payment on a traditional business loan. But, how does the lender take that percent of sales? 

Merchant Cash Advances and Repayment Terms

A merchant cash advance generally has three repayment methods: (a) split withholding, (b) lock box, and (c) ACH withholding.

Split Withholding to Repay a MCA

The first method to repay a MCA is split withholding. This repayment method is usually the most preferred because the lender collects on their repayment seamlessly. It’s all done electronically via the credit card processing company. 

The credit card processing company automatically splits your credit card sales between your business and the merchant cash advance provider. The percentage the MCA provider takes is agreed upon when you sign the advance paperwork. This percentage is called the “holdback” because the credit card processor holds back the money and sends it to the provider instead. 

Many small business owners find this the easiest repayment method for a MCA. You don’t have to worry about keeping cash in a bank account to make a loan payment, and you don’t have to wait an extra day to receive disbursements of credit card sales.  

Lock Box or Bank Account Withholding to Repay a MCA

The second method to repay a MCA is the Lock Box or Bank Account Withholding method. This repayment method is longer and more complicated than split withholding, and involves an additional intermediary. You’ll be dealing with a MCA provider, your credit card processing company, and your bank.  

Under this method, the bank splits the credit card sales or revenue credited to a business bank account. The bank forwards a portion automatically to the lender and deposits the balance into your business’ checking account. 

This method is the least advantageous for a business. There is a one-day delay in receiving the funds from credit card sales, which can further strain your cash flows. For this reason, it’s the least preferred method of business owners.

ACH Withdrawal Repayment of a MCA

The third and last repayment method is called Automated Clearing House, or “ACH”,  Withholding or Withdrawal. With this repayment method, the merchant cash advance provider receives the credit card processing information and directly deducts the holdback percentage from a checking account via ACH. 

This repayment method is the closest to a bank loan repayment because it’s a bank account deduction. If your MCA provider suggests this repayment method, you’ll need to make sure you always have enough cash in your bank account to cover the withdrawal. Otherwise, the payment could bounce and you’d incur fees. 

When deciding which merchant cash advance provider to work with, pay close attention to their preferred repayment method. A merchant cash advance can significantly improve your cash flows, giving you a lump sum when you need it most. But since the repayment method could have a significant impact on your cash flows, have a plan in place to repay it.

If these types of payment structures are not a good fit you may want to explore the variety of business loans we offer.

Businesses looking to improve their cash flow can take will find it easy to do by applying for a merchant cash advance. This financial tool lets businesses with strong credit and debit card sales sell projected credit and debit card sales for immediate cash. It is a very good alternative to business loans.

The best feature of merchant cash advance is repayment flexibility. Unlike business loans, businesses do not have to pay a fixed amount on specified dates. Repayment of a merchant cash advance is designed such that the required payment is dependent on credit or debit card sales. This gives business owners great flexibility in terms of repayment because if the business experiences a slow cycle the payments can adjust downward.

A merchant cash advance generally has three repayment methods: (a) split withholding, (b) lock box, and (c) ACH withholding.

The first method is split withholding. Split withholding is usually the most preferred repayment method because the collection is done electronically and seamlessly. Split withholding is when collection is done via the credit card processing company by automatically splitting the credit card sales between the business and the merchant cash advance provider. The percentage that will be paid to the provider is agreed upon beforehand.

The second method is the Lock Box or Bank Account Withholding method. In this repayment method, the credit card sales or revenue credited to a business bank account is split where a portion is forwarded automatically to the lender and the balance is sent to the business owner. This method is the least advantageous for the business because there is a one-day delay in receiving the funds from credit card sales. This repayment method is longer and more complicated than split withholding, it is also the least preferred method of business owners.

The third and last repayment method is called ACH Withholding or better said as ACH Withdrawal. ACH stands for automatic clearing house. In this repayment method, the merchant cash advance provider receives the credit card processing information and directly deducts a pre-agreed portion from a checking account via ACH. These are the three different types of methods to pay off a merchant cash advance.

A merchant cash advance provides critical capital to business owners and is a very useful financial tool that helps a business improve cash flow and liquidity. There are very flexible repayment methods which make it more attractive than business loans and a cash advanced can help any short term requirements for business financing.