Cash Advance Repayment Options

Last Updated on April 2, 2024

Shield Funding Team

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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.

3 Common Ways to Pay Off a Merchant Cash Advance

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? 

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.