merchant cash advance

Merchant Cash Advance v. ACH Advance

Small businesses and startups that don’t qualify for traditional bank loans have alternative funding options, such as a merchant cash advance and an ACH advance. While both products advance funds for essential business operations, there are differences between them.

How a Merchant Cash Advance Works

A merchant cash advance (MCA) is not a loan, but rather a purchase of your future credit card receipts. The MCA provider advances the funds in exchange for a percentage of your daily credit card transactions until the advance is paid in full (and all associated fees). 

How an ACH Advance Works

An ACH (Automated Clearing House) advance is similar to an MCA, however, an ACH advance is based on your bank account deposits. The provider offers funds based on your bank statements, including your cash flow, but does not consider your credit card sales. In fact, merchants that apply for ACH advances typically don’t accept credit cards, or may not accept as many card types as other businesses. 

MCA and ACH Approvals

To obtain an MCA, the funder will analyze your business’s past credit card transactions and projected future sales. Funds are advanced based on how well the business can bring in revenue. By contrast, an ACH advance provides funds based on your bank deposits and cash flow reports.

Payment Plans

The payment plans for these alternative funding products also differ. In a merchant cash advance, your business offers a percentage of daily credit card sales to the funder in one of two ways. The first is known as “split withholding,” in which your credit card processor divides daily receivables between you and the MCA provider, based on the agreed percentage. 

Another option is to transfer receivables into a bank account controlled by the funder, which takes its percentage first and sends the remainder to the merchant. In an ACH advance, the funder deducts funds directly from your bank account on a daily or weekly basis. 

The payment amounts also differ. In a merchant cash advance, your business can pay varying amounts since repayment is based on a percentage of your daily credit card receipts. An ACH advance requires a fixed payment each day or week.

Cost of Funds

Both cash advance options are based on a factor rate that is multiplied by the amount of the advance. Unlike an interest rate or an APR (annual percentage rate), the factor rate is not amortized over the term of the loan. When the factor rate is converted into an APR, the figure could be in the triple digits, which is an exorbitant cost of funding. 

The Bottom Line

Whether you choose an MCA or an ACH advance, both funding options have onerous payment terms. If your business defaults, the funder can seize your business and personal assets. If your business is at risk of defaulting on a cash advance, contact to explore all your debt relief options.