A Merchant Cash Advance is a type of financing available to business owners in need of immediate access to working capital. Rather than a traditional loan, a Merchant Cash Advance is structured as a lump sum payment to a business in exchange for an agreed-upon percentage of future credit card, debit card or cash sales.

As an investment, Merchant Cash Advances offer a variety of benefits to United Fundings. Due to the nature of Merchant Cash Advances, United Fundings typically sees a higher return on average compared to traditional loans. Due to a shorter term (ranging from 2 to 12 months) United Fundings capital is returned much faster and regularly. Correlation to traditional public equity and credit markets is typically low.

Merchant Cash Advances are acquired by applications from small business owners. Financial documents are then examined by underwriters in order to verify the applicant’s current financial circumstance. Once this information has been verified, the financing company determines a financial offer for the applicant. While applications are typically more relaxed than traditional loans, the application process still provides a thorough inspection to verify the business owner is able to repay the loan.

A Merchant Cash Advance is not a loan — rather, they are a sale of a portion of future credit/debit card and/or cash sales from a merchant. Therefore, Merchant Cash Advance transactions are not subject to state usury laws that limit lenders from charging high-interest rates.

Due to the speed of the Merchant Cash Advance approval and funding process, Finance companies typically apply a higher interest rate to balance their risk vs. potential return. Additionally, finance companies are purchasing future receivables and are not secured against any hard underlying fixed assets.

Historically we have seen default rates between 6.5% to 9.5% with United Fundings. Approximately 60% of the defaults are eventually repaid through modification with the business owner, and the remaining are dealt with through litigation for settlements.

Use of a Merchant Cash Advance is decided upon by the business owner. Typically a Merchant Cash Advance is used to enhance business and generate increased revenues through the purchase of inventory, acquisition of new equipment, the repair & maintenance of existing equipment, for marketing & promotions, or to expand their business. In order to secure the finance companies investment, Merchant Cash Advances are not typically available to business owners looking to complete payroll, pay rent, or pay debts.

ACH – stands for Automated Clearing House. which is the way transactions are processed between banks, typically taking 1-2 days.

ADB – Average Daily Balance, a key metric that is calculated when underwriting bank statements.

Broker – a sales representative that sells business financing products such as MCAs, loans and lines of credit.

Buyer – in a MCA contract the buyer is the funding company who is buying future receivables from the seller.

Buy Rate- The factor rate that a funder will go no lower than and the broker is at zero commission.

Ex: broker says to funder, “I have an offer with a lower buy rate, can you drop your rate BUT I’m still going to upsell 15 points??”

CC Split – Credit Card Split, is a merchant cash advance where the structure of paying back the money is in agreeing to split the gross sales from credit card processing to a fixed % that goes to the buyer and seller of the future receivables. This is typically used when there is a high volume of credit card sales when compared to regular bank deposit revenue. This is not a loan.

Clawback – when a commission is required, per ISO agreement, to be paid back from the broker because of a default by the merchant within agreed upon time.

Ex: Funder,” Hi Joe, your 100K deal that funded last week which you said the guy was a perfect payer closed his bank account and won’t pay, so we are going to have to clawback the $10k commission.”

COJ – Confession Of Judgement, is a written agreement, signed by the defendant (merchant), that accepts the liability and amount of damages that was agreed on, specifically used in only certain states in case of a default on a merchant cash advance

Ex: Almost everyone rejoiced when COJs were banned in NY besides certain funding companies who depended on them.

Debt Service – The total outstanding debt payments that a business is obligated to pay back.

Default – when a merchant violates their contract with their funding company. Terms of default vary by the funder.

Double Funding – typically used in the same manner as stacking(see below), but many think of this as a mca funding within a very short time of another mca funding, typically 1-7 days, which is more deceiving and can be considered a default and clawback of commission if the same broker proved to be the source of the second funding.

Early Payoff Discount – an amount that is calculated at the time of contract to reduce the cost of the advance if paid early according to the terms disclosed.

Factor Rate- the cost applied to a merchant cash advance or other factoring product where the amount of money approved to advance is multiplied by this cost or discounted in the case of an mca.

Ex: Factor rates at zero commission range from 1.05 to 1.49.

Funder – a business funding company that provides a Merchant Cash Advance, which is not a loan, and therefore not a lender.

Holdback – is the % amount set in a credit card split agreement in which that amount goes to the buyer of receivables.

Ex: A 15% Holdback(HB) would mean the funder is getting 15% of the total credit card sales each batch.

ISO – Independent Sales Organization, which is a company that operates to sell MCAs along with other loan products and employees brokers and other personnel. ISOs are essentially the same thing as business loan brokers and commercial finance brokers depending on the financing products they sell. The use of the term ISO originated in the card payments space.

Ex: The ISO is the whole company, a broker is typically the individual within that company.

Lockbox- 3rd party bank account where funds from payment processor are held until properly distributed to the merchant and to the lien holder.

Merchant Cash Advance (MCA) – the sale of future receivables at a discount(by upfront payment) where the payback is either by a set daily/weekly ACH payment or by splitting the business owners credit card sales at a fixed percentage. It is not a loan.

Ex: Business owner needs $100,000, he’s offered an MCA at a 1.30 buy rate over 10 months, so the total payback is $130,000, making 210 daily payments of $619.

Payoff Letter – a letter from a funding company that provides the amount for the merchant to pay the balance in full.

Ex: “The merchant says the other funder won’t give him the letter, can you fund him anyway??”

Payback Months – term used when requesting the bank statements from the previous year that would be coming up during the payback period of the advance being offered.

Percentage of Gross – the percentage of total relevant debt service payments paid monthly divided by the gross sales deposits per month.

Ex: A business owner wants $50,000, has gross revenue of $50,000/month, and the MCA funder approves a %10 Percentage of Gross equaling $5,000 worth of debt total payments per month the merchant can afford to make.

Points – are the percentage number that is added to the factor rate for a commission paid to a broker. 1 point is 1% of the total advanced amount. A point can also be added by the funder to increase the Buy Rate.

Position – derives from the legal place in the hierarchy a debtor has to collect according to any UCCs filed on a business. In everyday use in MCA, it’s known as an advance that a merchant has where 1 MCA would be 1 position, 2 MCAs would be 2 positions, and so on.

PSF – Professional Service Fee, a fee some brokers charge merchants for their service.

Ex: Most funders won’t allow an exorbitant PSF fee, which could be 3-5%

Purchase Price – is the advance amount.

Purchase Amount – is the total payback amount.

Remittance – The percentage of sales that is being withdrawn from the business bank account daily or weekly. There are other synonymous terms like ‘pull’.

Renewal – When a merchant takes another advance from the same funding company at a point when eligible. Renewals are where the most profit is made.

Seller – is the merchant who is selling his future receivables to the buyer.

Sell Rate – The total factor rate at which the broker has their commission added in, which would also be the rate reflected in the contracts.

Stacking – Refers to the funding of an additional advance behind one or more already existing advances. Oftentimes this can be considered a default to the existing merchant advance agreement.

Stips – Stipulations that are required to close on the advance. They include documents and other key information.

Ex: “Why so many stips, I had another offer with less”

Syndication – is a program that direct lenders offer to some ISOs to invest their own capital into their own cash advance submissions.

Term – the scheduled time in months or payments in which the client has to pay back the MCA. Earlier years were sometimes referred to as ‘turn’.