Mintmead Funding, a small-business funding service in Louisville, Kentucky, explains merchant cash advances: how a factor rate works, why it is not an interest rate, factoring versus an advance, what an advance agreement covers, and when working capital or a line of credit fits better.
At a glance
- What it is
A purchase of future receipts, not a loan
- Cost set by
The factor rate, in dollars
- Collected
A share of card sales or bank deposits
- Compare with
Working capital and a line of credit
Factoring vs MCA for Jefferson County, KY businesses
Factoring and a merchant cash advance both turn future money into cash now, but they sell different things. Factoring sells invoices you have already issued to business customers; the factor collects from those customers. An advance sells a share of sales you have not made yet, and the funder collects a percentage of your receipts, card settlements or bank deposits, until the agreed amount is remitted.
Factoring suits businesses that bill other businesses on terms, such as a contractor or a distributor. An advance is aimed at businesses whose sales come in daily, such as restaurants and shops.
Factor rate and interest: why they differ
A factor rate is a multiplier on the amount advanced, not a yearly interest rate. In an invented example, a 1.30 factor on a $30,000 advance means $39,000 is to be remitted. Because the cost is fixed in dollars and collection speed depends on sales, the effective yearly cost rises when sales are strong and the amount is collected sooner.
Illustration only, invented figures: a $30,000 advance at a 1.30 factor is $39,000 to be remitted. With a 12% holdback on $2,500 of daily card sales, $300 is collected each sales day. Our arithmetic: $39,000 / $300 = 130 sales days. The cost is $9,000 whether that takes 130 days or 100.
Merchant cash advance agreements around Louisville, KY
Read the agreement for the purchased amount, the purchase price paid to you, the specified percentage of receipts, how collection works (split card settlements or fixed debits from your bank account), any reconciliation clause that adjusts collections when sales fall, fees taken from the advance at funding, and what counts as default.
If the agreement calls for fixed daily debits without a way to adjust them to sales, ask the funder in writing how reconciliation works before signing.
What is a money factor rate? A short answer for Louisville, KY
Money factor is a term from vehicle and equipment leasing: a small decimal used to work out the lease charge, which some lessors convert to a rough yearly rate by multiplying by 2,400. It is not the same as an advance's factor rate. An advance's factor rate multiplies the amount advanced to give the total to be remitted.
What is the merchant cash advance experience like? Practical notes from Louisville, KY
Paperwork for an advance may be limited to recent bank or card statements, and collections begin soon after funding. The collections are the part to plan for: a share of every sales day goes to the funder until the purchased amount is remitted. Taking a second advance on top of a first, known as stacking, multiplies those collections.
Before choosing an advance, set it against a working capital loan and a business line of credit in total dollars over the same months. The six structures compared page shows how each is paid back.
Merchant cash advance investing for owners in Jefferson County, KY
Funders raise money to buy receivables from investors, and some owners come across offers to invest in advance portfolios themselves. That is a separate question from taking an advance for your own business and outside what this site covers. For owners weighing an advance, the useful view is the funder's: it profits from the gap between the purchase price and the purchased amount, so that gap is the cost you are paying.
Restaurants and shops with card-heavy sales are the businesses advances are pitched to; the industry pages show how each trade's cash calendar fits the other structures, and the Louisville, KY data page counts Jefferson County's businesses by sector. The revenue based financing calculator runs the total-remitted arithmetic.
By Mintmead Funding · Updated