Merchant cash advance companies give a Vineland, NJ restaurant or salon a lump sum in exchange for part of its future card sales, collected through a daily share or a fixed debit until an agreed total is reached. An advance is not a loan. Two offers should be compared by cost per dollar actually received, not by the factor alone. The offers here are invented.
An offer shows what the funding source buys: the sum advanced, the total it collects, the share or debit, and any fee taken at funding. A lower factor with a fee can cost more per dollar received than a higher factor without one. A daily split slows on a short week while a fixed debit does not, and a loan or line for the same sum costs less in this invented case.
What merchant cash advance companies buy, and the lines on an offer that show it
A merchant cash advance is not a loan. The funding source buys a set amount of the business's future card sales at a discount and collects it from card deposits. An offer from any of these companies can be read line by line; these are the lines that matter:
- The sum advanced: what the business is paid for its future card sales
- The total to be collected, and the factor that links the two
- Any fee taken out at funding, which lowers what actually reaches the account
- How collection works: a percentage of each day's card sales, or a fixed daily or weekly debit
- Whether the agreement allows the debit to be adjusted if card sales fall, and how to ask for that
- What happens on early payoff, and whether a second advance is allowed while this one runs
If a line is missing from an offer, ask for it in writing before signing.
Factor rate and the cost per dollar received, worked from two invented offers
The factor alone does not settle which offer costs less. In this invented case a restaurant receives two offers for $15,000:
| Offer | Sum advanced | Factor | Fee at funding | Reaches the account | Total collected | Cost | Cost per dollar received |
|---|---|---|---|---|---|---|---|
| Offer A | $15,000 | 1.31 times | $900 | $14,100 | $19,650 | $5,550 | $0.39 |
| Offer B | $15,000 | 1.36 times | None | $15,000 | $20,400 | $5,400 | $0.36 |
Offer A has the lower factor, but its $900 fee means only $14,100 arrives. Divide each cost by what reaches the account and Offer B comes out cheaper in this invented case, $0.36 per dollar received against $0.39. Neither figure is an annual rate, because the cost does not change with how long collection takes.
A restaurant cash advance collected by daily split or by fixed weekly debit, shown on a short week
An invented restaurant runs $9,800 of card sales in a normal week and $6,100 in a short one, when the dining room closed two nights for a kitchen repair. The same advance can be collected two ways:
| Collection method | Normal week | Short week |
|---|---|---|
| 10% split of card sales | $980 | $610 |
| Fixed weekly debit | $900 | $900 |
In the short week the 10% split collects $610. The weekly debit does not move: $900 leaves the account, equal to 14.8% of what came in on cards that week. A split stretches the calendar when sales fall, while a fixed debit keeps the calendar and squeezes the account. Either way, the total collected stays the same.
Before signing: the same sum as a short-term loan or a line of credit draw
Before signing, the same $15,000 can be priced as a loan and as a line draw, using invented terms. A short-term working capital loan at 14.5% a year for 12 months comes to $1,350.34 a month and $1,204.08 of interest. A line of credit draw at 16.0%, paid down by $2,500 a month, costs about $700.00 in interest.
Both are well under Offer B's $5,400 in this invented comparison. A loan or line may ask for more paperwork or a credit check than an advance, and a funding partner decides whether to offer either; the comparison is still worth making before the advance agreement is signed.
By Rowanstead Advances · Updated
