What is the underwriting methodology in a merchant cash advance?

What is the underwriting methodology in a merchant cash advance?

A business 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 small business 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 business owners to understand this distinction.

The hold-back percentage is based on:

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

For Example: A business is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the business agrees to have 15% of the business’ credit card transactions withheld by the advance company (the holdback) until the $13,000 is collected. If the business 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.

Interested to learn more? Merchant Loans: Cash Advance Business Loans Simplified