A merchant cash advance works by advancing a portion of your future daily debit and/or credit card sales in a lump sum to you. Credit and debit card transactions involve electronic processing through payment networks and card issuers, which requires infrastructure and services provided by merchant services providers. These transactions leave a digital trail that can be tracked and recorded, making it easier for businesses to reconcile their sales and for lenders to assess transaction history, so they can assess you differently as compared to applying for a working capital loan.
Unlike most business loans where there is a fixed term or tenure and monthly instalment, a percentage of your card sales are released to the Financing Partner until the lump sum has been paid back.
It is a pre-negotiated percentage (for example 5-20%) and may be suitable for retailers with fluctuating monthly sales due to seasonal demand, as they repay more when there are more sales, instead of a fixed monthly instalment that can be harder to stick to on months where there are lesser customers.
The mutually agreed-upon percentage is called a “holdback” or “retrieval rate” and the “lender” will prepare a letter for you to sign and inform the card processor to process it.
Other terms used for MCA include Future Receivables, Point of Sale Loan, POS Loan, Credit Card Receivables Financing, Turnover-Based Loan and Merchant Financing.