What Is a Holdback Rate and Why Does It Matter?

If you run a business and are considering a merchant cash advance (MCA), you’ll likely encounter the term “holdback rate.” It’s essential to understand this concept, as it directly affects your daily cash flow and how quickly you repay the advance.

What Is a Holdback Rate?

The holdback rate is the percentage of your daily credit card sales that a lender withholds to repay the MCA. Think of it as a daily deduction from your revenue until the full amount owed is paid off.

Example: If your holdback rate is 10% and you process $1,000 in credit card sales in a day, $100 will go toward repaying the advance, and you’ll keep the remaining $900.

Why Does the Holdback Rate Matter?

• Repayment speed: A higher holdback rate means faster repayment. A lower rate spreads repayment over a longer period.
• Cash flow impact: The rate affects how much money you retain for daily expenses. A higher rate leaves you with less working capital.
• Total repayment time: Your daily sales volume and holdback rate determine how long it takes to pay off the MCA.

How It Works

Let’s say you have a 15% holdback rate and process $1,000 in daily sales:

• $150 is automatically deducted for MCA repayment.
• $850 remains for your business expenses.

This process continues daily until the advance and fees are repaid in full.

Why Understanding It Is Important

Choosing the right holdback rate helps you manage cash flow effectively. If the rate is too high, you may struggle to cover operating costs. If it’s too low, repayment takes longer and could increase your overall cost.

Understanding the Factor Rate in a Merchant Advance

In addition to the holdback rate, another critical term in an MCA contract is the “factor rate.” This determines your total repayment amount.

What Is the Factor Rate?

The factor rate is a fixed multiplier applied to the funding amount. Unlike interest rates, it doesn’t change over time.

Example: If you receive a $10,000 advance with a 1.20 factor rate, you’ll repay $12,000 in total ($10,000 x 1.20).

How Is the Factor Rate Different from Interest?

• It’s a one-time multiplier, not a percentage charged over time.
• It stays fixed regardless of how quickly you repay.
• It clearly shows the total repayment amount upfront.

Why It Matters

• Clarity on total cost: You know exactly how much you’ll repay.
• Cash flow planning: Knowing the full repayment amount helps you prepare your budget.
• Comparison shopping: Understanding factor rates helps you evaluate competing MCA offers.

Factor Rate Example

If you take a $15,000 advance at a 1.30 factor rate:

• Total repayment = $19,500 ($15,000 x 1.30)
• You pay back the $15,000 principal + $4,500 in fees

Bottom Line

• The holdback rate determines your daily repayment amount and impacts cash flow.
• The factor rate shows the total repayment and should be reviewed carefully.
• Choosing the right holdback rate and understanding your factor rate ensures your business remains financially stable while repaying the advance.

What Now?

Before accepting a merchant cash advance, review both the holdback and factor rates. These two numbers define your daily cash flow and overall cost—understanding them will help you make the smartest financial decision for your business.