So here’s how a merchant cash advance works as opposed to traditional bank loans. The size of your borrowing amount and your merchant cash advance terms depend primarily on your previous and anticipated monthly credit card sales volume. This is the main criterion for merchant cash advance qualifying in general. As long as you have strong sales from debit and credit cards, poor credit probably won’t prevent you from qualifying.

However, your business credit profile impacts several other merchant cash advance loan elements. This includes the fixed percentage of daily or weekly sales deducted, called the “holdback rate” or “holdback percentage.” Typical holdback rates run between 8% and 15% of daily sales. So, your holdback amount changes based on business revenue.

Each borrower is assigned a Factor Rate instead of an interest rate as you have with traditional bank loans. This determines the total amount you will repay the merchant cash advance provider. A typical factor rate typically ranges from 1.09 to 1.5.

Example of a Merchant Cash Advance:

For example, say you borrow $50,000 with a factor rate of 1.4. This means you’d owe $70,000 in total. MCA providers deduct 10% of your debit and credit card transactions each time you batch out. In the first month, you generate $100,000 in card transactions. Based on your holdback percentage, you’d pay $333 daily to pay back $10,000 monthly. In the second month, your sales drop, and you only have $70,000 of credit card receipts. Since the holdback repayment terms and percentage never change, your daily payment would drop to $233.

Like other short-term business financing products, business cash advances are designed to be paid in full as soon as possible. However, the total cost decreases when your outflows are more spread out due to slow sales.