Paying back cash advances: Holdback, ACH or trust account

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Ask a Lender
September 20, 2017


Key Points

Cash advance repayment

  • With a holdback percentage, your credit card processor directly transfers a percentage of your sales to the cash advance provider.
  • A fixed automated clearinghouse withdrawal deducts a set repayment amount each month from your bank account.
  • A trust account receives all of your sales revenue and pays the cash advance provider before sending you the balance.

When your small business needs a quick capital boost, there aren’t many fast and easy financing options out there. Consequently, many small businesses turn to cash advances that — despite their high costs relative to conventional business loans — can fund within days with limited credit requirements.

A cash advance is a commercial transaction, not a loan. The cash advance company purchases a percentage of a business’ future sales — either credit and debit cards sales, or checks and bank deposits — for a fee.

The factor rate — effectively the interest rate — of a cash advance is the first element to consider when thinking about this type of financing. If you decide that the cost of a cash advance makes sense for your business, the next decision is how you will pay back the cash advance company. This can be arranged through a holdback percentage, automated clearinghouse (ACH) or trust account.

Holdback Percentage

With a holdback percentage, also known as split withholding, you agree to repay the cash advance company a set percentage of your future sales until the advance and all associated fees are paid off. This is arranged directly with your credit card processing company, which deducts and transfers the agreed funds to the cash advance provider every day or week. Using a holdback percentage is more common for businesses that deal primarily with debit and credit card sales, such as retail stores.

As the holdback percentage depends on your volume of sales: the higher your sales, the faster you repay the advance. Conversely, if you have a slower sales month, your payment will be lower. Remember that paying off the advance faster does not save you money as it would with a conventional loan. The cost of a cash advance is charged on the entire principal being advanced. The interest charged on a conventional loan, on the other hand, is based on the remaining loan balance and decreases over the term of the loan.

The benefit of a holdback percentage is that the amount you owe rises and falls with your revenue, so you aren’t saddled with a major charge during low sales periods. Most small businesses underestimate how long it will take to repay a cash advance, however, and the daily percentage deductions can significantly choke cash flow. Another downside of a holdback percentage is that some cash advance providers require you to change credit card processors to their preferred partner, which can burden your business with more fees.

Fixed ACH

Fixed ACH withdrawals are another cash advance repayment option. A fixed daily or weekly payment is deducted from your business’ merchant bank account and transferred to the cash advance provider until the advance and all its fees are repaid.

The benefit of this arrangement is that your business has clarity on exactly how much needs to be paid each period. You also do not need to involve — or change — your credit card processor. As the payments are fixed and automated, however, businesses can risk overdrafting their accounts if they have a period of slow revenue.

Trust Account

A trust account — also known as a lockbox — is a separate bank account set up either by a third party or by the cash advance company itself. Your business agrees to send all sales revenue to this account, from which the cash advance provider deducts a percentage of sales, transferring the remaining balance back to your merchant bank account.

A trust account does not require you to change or involve your credit card processor in the repayment process. It does, however, entrust all of your sales revenue to a third party. Furthermore, it delays your access to capital as it typically takes one or two days for funds to be distributed from the lockbox, stagnating your cash flow.

The cash advance repayment option that works best for your business depends on your finances and how much control you want to have over your incoming revenue. Remember that regardless of the repayment method, a cash advance is the most expensive form of business financing on the market. Consider alternatives first and compare cash advance providers to get the best rate available before you proceed.

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