How does a nightclub business cash advance work?

My answer to Quora: How does a nightclub business cash advance work?

An agreement is made between the nightclub owner and the MCA provider regarding the advance amount, payback amount, hold-back and term of the advance. Once an agreement is made, the advance is transferred to the nightclub’ bank account in exchange for a future percentage of credit card receipts.

Each day, an agreed upon percentage of the daily credit card receipts are withheld to pay back the MCA. This is called a “hold-back” and will continue until the advance is paid in full. Access to a nightclub owner’s merchant account eliminates the collateral requirement required for a traditional small business loan.

Because repayment is based upon a percentage of the daily balance in the merchant account, the more credit card transactions a nightclub does, the faster they’re able to repay the advance. And, should transactions be lower on any given day, the draw from the merchant account will also be less. This means that during times of slow business, the nightclub’ payback is relative to their incoming cash flow.

Repayment Costs

A nightclub that uses a Merchant Cash Advance will typically pay back 15% – 40% or more of the amount borrowed. This percentage is called the factor rate.

Note: there’s a difference between the hold-back amount that a nightclub pays every day (as a percentage of their sales receipts) and the repayment amount for the entire advance. There could, for instance, be a hold-back of 15%, and a repayment of 30%, so it’s important for nightclub owners to understand this distinction.

The hold-back percentage is based on:

  • The amount of funds a nightclub receives
  • How long it will take to pay back the money
  • How big the monthly credit card sales are

For Example: A nightclub is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the nightclub agrees to have 15% of the nightclub’ credit card transactions withheld by the advance company (the hold-back) until the $13,000 is collected. If the nightclub is averaging $14,500 a month in credit card sales, approximately $2,160 would be withheld each month and the advance would be paid back in roughly six months. Typical hold-back rates may range from 10%-20%, though this can vary widely based upon the nightclub and risk.

Check out this article which goes into more depth… Nightclub Loans: Working Capital & Cash Flow Solutions to Fuel America's Hottest Nightclubs