What Are the Common Repayment Methods In Merchant Financing?

The Money That Leaves Before She Sees It

Maria checked her restaurant’s bank balance on Wednesday morning, as she always did, and was surprised to find that instead of the usual $4,200 from Tuesday’s dinner service, the deposit was only $3,640. Confused, she called up the details of the transaction and found the following notation: “MCA Payment: $560.” It was then that the true extent of her merchant cash advance became clear to her. The funds were not sitting in her account, waiting to be transferred as payment. They had already been deducted, automatically removed from the credit card processing of the previous day and remitted directly to the MCA lender.

This is the most popular form of repayment in merchant financing, and it is a completely different process from the usual loan repayment method, where you write checks or make transfers on designated dates.

Split-Withholding: The Automatic Method

The most common repayment method for merchant cash advances based on credit card sales is as follows: When your customers swipe their credit cards at your business, the payment processor automatically separates each day’s processing before the funds are deposited into your account.

Maria’s MCA had a 14% holdback. Daily, 14% of Maria’s credit card transactions were set aside for the MCA provider, and 86% was available to her. On a $5,000 processing day, $700 was for repayment and $4,300 was for her. On a slower day of $2,000, $280 was for repayment, and $1,720 was for her.

The best part about this method is that it automatically synchronizes with revenue. Days of high sales generate higher payments if the cash flow is able to manage it; days of low sales generate lower payments that correspond to lower revenue. You will never miss a payment since you will never have control of the money in the first place. The problem? You’re essentially working on 86% of your processing capacity, not 100%, which can have implications for working capital planning that aren’t always immediately apparent until you’re living with them on a daily basis.

ACH Withdrawal: The Direct Debit Method

Some providers use fixed daily or weekly payment amounts rather than percentages. You might agree to pay $350 every business day for 180 days, totaling $63,000 in repayment.

This creates predictability but loses the flexibility that percentage-based payments provide during revenue fluctuations. Strong month? You still pay $350 daily. Terrible month? You still pay $350 daily. It's essentially a daily installment loan disguised as an MCA.

Weekly ACH: The Consolidated Method

However, some processors take lump sums each week instead. When a 14%holdback requirement exists to process a 25,000 cash flow each week, expect to lose around 3,500 each Friday. Although fewer transactions are made, it contributes to one single, larger cash outflow that may conflict with other time constraints that need to be met. For example, if everything must be done by Friday, losing 3,500 through cash flow may not be so painless after all. 

Lockbox Arrangements: The Controlled Approach 

In larger MCAs or in riskier situations, some merchant account providers insist on having ‘lockbox’ arrangements where your credit card processor makes payments into an account maintained by the merchant account provider. From there, they deduct their portions and send the rest to your business account. This approach maximizes their control but offers little room for maneuvering to you, the business owner. This is not very common and is only used in situations where there is a special need to ensure payments are safe.

The Reality of Repayment

Regardless of what the method may be, there is one thing that all merchant cash advances have in common. Payments come out automatically, without any effort from you, on a daily or weekly basis until the amount has been fully repaid. They go along for the ride with your business, growing and shrinking with the fortunes of your business, especially if it’s percentage-based. And they are squeezing your working capital while doing it.

Consider the case of Maria. Due to split withholding, instead of taking home $4,200 daily, she was able to take home only $3,640 for five months. This deficit of $560 daily added up to a whopping $16,800 monthly, which automatically went to her MCA provider before she could take care of other essential payments such as rent, groceries, and salaries. This auto-system ensured that she made payments to the loan each month, but she was not given a choice to set it aside when she was not bringing in so much.

Understanding how the payments work before you agree to terms could save you the shock Maria experienced when she came to realize her deposit had actually been reduced by $560 when she expected it to be higher. It somehow leaves, business day in and business day out, until the entire advance has been repaid.