A merchant cash advance (MCA) is not exactly like a traditional business loan, but in broad strokes, they both involve receiving a lump sum that you are expected to pay back over time, plus interest. However, the way the debtor repays an MCA is different than the monthly payments usually associated with a small business loan from a bank.
Each MCA company has its own terms for repayment, but there are three common methods. These are called split withholding, lock box and ACH withholding.
- Split withholding works by having each credit card sale split between the merchant and the MCA company. Because the credit card processing company handles this for you, many small business owners prefer this method. However, a slow business period can put you at risk of falling behind because the MCA company will still expect its money.
- Lock box is a little more complicated. Instead of credit card proceeds going directly to the business and MCA company, they go into a bank account. The bank splits up the money and forwards the MCA company its share. This can mean your business must wait an extra day to receive your credit card revenue.
- Automated Clearing House (ACH) withholding is where the MCA provider deducts its payments from the client’s checking account itself. The business owner must keep a close eye on the account to ensure there is enough money in there to cover the MCA company’s withdrawals or risk penalties.
Whatever repayment method you and your MCA provider agree upon, there could be serious risk to your company. You could need legal assistance to save your business and avoid financial abuse.