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How does Business Cash Advance work? [Simple guide with examples]

A Business Cash Advance, also known as Merchant Cash Advance, is a flexible way to inject cash into your business. Basically, you receive a lump sum of money that you payback with a percentage of your daily credit card sales.

The biggest benefits of merchant cash advance financing? You don’t need collateral, and you can get approved with bad credit. That’s because the merchant cash advance company will mainly check your daily/monthly credit card sales for repayment rather than your credit score.

First, let’s talk about the essentials you need to know before diving into some examples.

Business Cash Advance: The Essentials You Need to Know

There’s a few critical points you need to know before applying for a merchant cash advance. Merchant cash advance companies will use terms like factor rate and holdbacks to make their offer. We’ll guide you through the lingo so you can make an educated decision in the future.

  • Factor Rate: it’s a multiplier (usually ranging between 1.1 – 1.5) that determine the total amount you will need to payback. For example, with a business cash advance of $10,000 and a factor rate of 1.20, you will have to pay back a total of $12,000 (10,000 x 1.2).
  • Holdback: this is the percentage of credit card sales that contributes to your payback. For example, a daily revenue of $5,000 with a holdback of 10% means that $500 are withheld and contributes to your payback. Leaving you with $11,500 left on the $12,000 merchant cash advance.
  • Fees: calculated with the factor rate. It’s the difference between your merchant cash advance and the total payback amount. $2000 in our example ($12,000 – $10,000).
  • Payback amount: the total amount you need to pay back, including the fees. $12,000 in our example.

The table below sum up all the information nice and clear, based on our $10,000 cash advance example.

Merchant Cash AdvanceFactor RateFeesPayback Amount

Important to know: the factor rate is determined by the merchant cash advance company. It’s usually based on your daily sales, your capacity to make repayment, and an overall risk assessment. The riskier the investment, the higher the factor rate.

These are the main terms you need to know when looking for a business cash advance. Now let’s find out how it actually works.

How does it actually work?

A merchant cash advance gives you a one-time sum of cash that you can invest in your company. You then repay the total amount of the advance with a percentage of your daily/monthly sales (holdback). This means you payback faster during high season, and don’t starve your business cashflow during low seasons.

1. Invest the money from your merchant cash advance

After the cash advance company checked your application, determined your factor rate, and made you an offer you accepted, the cash will be sent to your business account. It’s usually a fast process that only takes a few days.

Once it’s available, you can inject the money into anything that would improve your business. Whether you need to upgrade your kitchen, purchase inventory, hire new employees, or literally anything else, you now have the potential to grow your business.

2. Use your investment to make more sales

You daily sales will contribute to pay back your cash advance right after you received your money. Depending on the holdback you agreed upon, a fixed percentage of your sales will be withheld to repay the business cash advance.

Because of the way you pay back a merchant cash advance, it makes investing in your business safer. And if you make a good investment that bring more sales to your business, you will repay your advance faster.

3. Pay your business cash advance back

You pay back your cash advance with every sale. This means, the more sales you make, the faster you pay back. This also means that a dip in sales doesn’t drown your entire business.

Besides, there’s generally no collateral for merchant cash advance, which make paying it back easier on the mind compared to traditional loans.

Business cash advance examples

Now let’s apply this to some examples with figures to see how a business cash advance really works.

A restaurant needs a $20,000 cash advance to upgrade its kitchen

In this example, a restaurant owner determined that he needs $20,000 to renovate his kitchen. This project will allow him to provide better work conditions and as a result, improve the speed at which he serves his customers.

After requesting free estimates from several business cash advance companies, he accepts an offer for $20,000 with a factor rate of 1.3, and a holdback of 18%. Two days later, he receives the money and holdbacks start contributing to his total payback amount of $26,000.

With his new equipment, the restaurant is averaging $12,000 a month in credit card sales. With a holdback of 18%, it means $2,160 are withheld and contribute to the total payback amount every month. At that pace, the restaurant owner will pay back his business cash advance in roughly a year.

MCAFactor RateFeesPayback AmountHoldback

A retail store owner plan to invest $10,000 in inventory for the new season

When managing a retail store, it’s critical so stay on top of trends. But buying inventory when you don’t know what product will sale can be tricky. In this case, a merchant cash advance is a safer solution. With this example, a retail store owner plan to invest $10,000 in its next collection.

After shopping around, they accept an offer for $10,000 with a factor rate of 1.2, bringing the total payback amount to $12,000. The holdback is settled at a nice 15%.

It’s the high season and the new collection is a hit. The store is averaging $22,000 a month in sales. On average, the retail store will pay back $3,300 per month with the previously agreed holdback of 15%. At this pace, the business cash advance of $12,000 will be paid back in a little bit less than 4 months.

MCAFactor RateFeesPayback AmountHoldback

Apply for a merchant cash advance today.

Now that you learned how a business cash advance works, make sure to request a free estimate at Just Capital. We can help you get the capital you need to grow your business.

Be sure to check our requirements before applying:

  • Business account: You have at least five deposits a month
  • Revenue: You have at least $10,000 of monthly sales
  • Years in business: You have been in activity for at least two years