This page from Aspenspring Business Loans in Durango, Colorado explains merchant cash advances, which are not loans: what a cash advance company does, how the factor and holdback set the total remitted, how revenue-based financing compares, and how to turn a factor into a cost that can be set beside a loan, with invented worked figures.
At a glance
- Accommodation and food services employers, La Plata County, CO
232 (County Business Patterns 2023)
- Retail trade employers
285 (County Business Patterns 2023)
- Employers with fewer than five employees
60.7% (County Business Patterns 2023)
Revenue-Based Financing vs Merchant Cash Advance: Two Ways to Share Sales
Both products take a share of future revenue rather than fixed payments. A merchant cash advance provider buys a share of future card receipts and collects a set percentage of each day's card sales, the holdback, until the agreed total is met. Revenue-based financing is a broader term: a funder collects a percentage of all revenue, card or not, on a schedule, until a set multiple of the amount advanced has been paid.
Illustration only, invented figures: under revenue-based terms that collect 6% of monthly revenue, a month with $40,000 of sales sends $2,400 and a month with $25,000 sends $1,500 (our arithmetic). Some revenue-based agreements are written as loans and some as purchases; read which one an offer is before comparing it.
What Is a Merchant Cash Advance Company?
A merchant cash advance company is a provider that buys future card receipts from businesses. It is not a bank, and the agreement it signs is a purchase of receivables, not a loan. The provider collects its share either by splitting card settlements at the processor or by debiting the business bank account on a set schedule, adjusted to card sales.
La Plata County, CO had 232 accommodation and food services employers and 285 retail employers in 2023 (County Business Patterns 2023). Businesses that take most of their sales by card are the ones these providers assess, since card receipts are what is bought.
Holdback Payments and How the Daily Share Is Set
Holdback is the name for the slice of daily card sales that goes to the provider. Illustration only, invented figures: a $30,000 advance at a factor of 1.32 means $39,600 must be remitted, a cost of $9,600. With a 12% holdback and $1,500 of card sales a day, $180 goes to the provider each day, and the total is collected in about 220 selling days (our arithmetic).
If daily card sales drop to $1,000, the holdback falls to $120 and collection stretches to about 330 selling days (our arithmetic). The total stays $39,600; only the time changes in this invented case. Agreements that debit a fixed daily amount instead of a true percentage do not adjust this way unless a reconciliation clause is used, so read how collection works.
Converting a Factor Into a Cost You Can Compare
A factor is not an interest rate. The $9,600 cost on a $30,000 advance is 32% of the sum advanced (our arithmetic), whether the total is collected in four months or eight. The shorter the collection period, the higher the cost per month. To compare an advance with a loan or a line of credit, put both in total dollars for the same amount and the same period.
- The amount received after any fees.
- The factor and the total to be remitted.
- The holdback percentage or the fixed debit, and how it adjusts.
- Whether a reconciliation clause lets the debit follow actual sales.
- What the agreement says happens if the business closes or sales stop.
What Merchant Cash Advance Means in the Agreement
Read the agreement's own wording for three points: that the provider is purchasing future receivables, how and how often the holdback is collected, and what remedies apply if the business diverts card sales or changes processors. Any personal guarantee of performance is in the agreement too. The heading of a contract does not settle whether it is a loan; its terms do.
Is a Merchant Cash Advance a Good Idea for a Card-Heavy Business?
It can fit a business with steady card sales, a short-term need and no other option within reach, because collection follows sales. It can strain a business when the total cost is high relative to the margin, or when a second advance is taken to cover the first, known as stacking. Compare it in total dollars with every alternative, and with waiting, before signing.
Working capital loans and lines of credit are the usual alternatives for the same gaps; the comparison page sets all six side by side, and the restaurant page and the retail page cover card-heavy trades.
For the cost side of this comparison, the article on what moves loan rates explains why a factor and an annual rate cannot be set side by side without converting one of them.
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