Rowanwood Lenders, a small-business funding broker in Santa Fe, New Mexico, walks owners through merchant cash advances and introduces funders when one fits. A merchant cash advance is not a loan: it is a sale of future receipts, collected through a holdback or fixed debits. Funders review card and bank receipts and set the factor rate and terms.
| What it is | A sale of receipts yet to come; never a loan |
|---|---|
| Pricing | Advance times a factor rate |
| Collection | A share of receipts, or fixed debits |
| Length | Open-ended until the purchased amount is collected |
| Funders review | Card and bank receipts |
| Decision | Made by the funder |
Why a merchant cash advance is not a loan
With a merchant cash advance, a funder pays a lump sum now in exchange for a specified amount of the business's future receipts. There is no interest rate and, in a true advance, no fixed term: the funder collects its purchased amount as receipts come in. Because it is a purchase rather than a loan, many protections and disclosures that apply to loans may not apply in the same way.
An advance worked through in dollars
Hypothetical figures, for illustration only: a funder advances $20,000 with a 1.3 factor rate. The purchased amount is $26,000, so the cost is $6,000. If the funder collects a holdback of 10% of daily card receipts and the business takes in $2,000 a day, collection runs about $200 a day and lasts roughly 130 business days. Slower sales stretch that out; faster sales shorten it, which can make the effective annual cost very high.
A factor rate is not an interest rate and cannot be compared with one directly. Convert every offer to total dollars remitted and the daily or weekly amount taken before comparing it with a working capital loan.
Holdbacks, fixed debits and true-ups
Holdback means the slice of each day's receipts the funder takes. Some advances take it automatically from card settlements; others debit a fixed daily or weekly amount from the bank account based on an estimate of receipts. With fixed debits, ask whether the contract allows reconciliation: an adjustment when actual receipts fall below the estimate. How reconciliation works is one of the most important lines in the contract.
Does a merchant cash advance report to credit?
Practices vary. Many funders do not report regular remittances to business credit bureaus, but a default or a lawsuit may show up elsewhere. A funder will usually file a UCC financing statement on receivables, which later lenders will see.
Daily remittances against a slow week
The fixed daily debit is where advances most often go wrong. Using the hypothetical figures above, a business that normally takes in $2,000 a day and remits $200 can absorb it. If a slow week cuts daily receipts in half and the debit stays at $200, the remittance has doubled as a share of sales. Before signing, test the debit against your weakest week of the past year, not your average, and ask in writing how quickly a reconciliation request is answered.
Stacking and default
Stacking piles a fresh advance onto one whose collection has not finished. Each new holdback reduces the receipts left to run the business, and many contracts forbid stacking outright. What counts as default, and what the funder may do then, varies by contract and should be read carefully.
Is an advance a legitimate thing to sign?
Merchant cash advances are a real product used by businesses with heavy card sales, but the cost is often far higher than a loan's, and terms vary widely between funders. Be wary of any funder that pushes you to sign before you have read the contract, will not show the total purchased amount in writing, or tells you a factor rate is the same as an interest rate.
Card-heavy sectors of Santa Fe County, NM
Card-heavy businesses are the usual candidates. In Santa Fe County, NM that means retailers (793 employer establishments in 2023) and food services and drinking places (400), according to County Business Patterns 2023. Our industry pages explain the loan options those sectors should price first, and the Santa Fe, NM figures page shows the county's sector mix.
Price the loan options first
Before taking an advance, ask whether a loan option could cover the same need. A working capital loan or a line of credit is usually cheaper in total, even if it takes longer to arrange. An advance can make sense when receipts are strong, the need is urgent and short, and the owner has compared the total remittance with the cost of not acting. It should rarely be the first option considered.
Before signing an advance
- Write down the total purchased amount and the advance; the difference is the cost.
- Find the daily or weekly remittance and test it against a slow week.
- Read the reconciliation clause.
- Check for stacking restrictions and default terms.
- Compare with a loan offer on total dollars repaid.
We go through these steps with you on the phone. Our process page explains how a request moves.
By Rowanwood Lenders · Updated
