No. A merchant cash advance is written as a purchase of future card sales, not a loan: a provider pays a lump sum now and collects a fixed total from a share of each day's card batch. Because it is not a loan, it is priced with a factor rate, and comparing it with a loan or a line means converting everything to dollars.
An article from Brookharbor Lenders in Charleston, West Virginia on how a merchant cash advance differs from a loan, with Kanawha County restaurant counts and an invented advance, line and loan set side by side.
Merchant Cash Advance vs. Loan: The Legal Form and the Cost
A loan is money borrowed and repaid with interest on a schedule. A merchant cash advance agreement is written as a sale: the restaurant sells a share of its future card receivables to the provider for a price paid up front. The provider then collects the purchased amount as card sales come in.
That difference in form has practical effects. An advance has no interest rate in the usual sense, so its cost is set by the factor rate: an invented $20,000 advance at a factor of 1.4 means $28,000 will be collected. Collection is tied to sales, so it speeds up in busy weeks and slows in quiet ones, but the total stays the same. How holdbacks and daily batches work is set out on the merchant cash advance page.
What Is a Holdback Fee in a Card-Sales Advance?
The holdback is the percentage of each day's card sales the provider collects, for example 10%. It is not a fee in itself; it is the rate at which the purchased amount is collected. The cost of the advance is the difference between what is collected and what was advanced.
Some agreements also carry fees at the start, such as an origination or underwriting fee taken out of the advance, which reduces the money the restaurant actually receives. Ask for the net amount received and the total to be collected, both in dollars.
Merchant Cash Advance vs. Line of Credit for a Charleston, WV Restaurant
A line of credit charges interest on what is drawn for as long as it is outstanding, and the restaurant can repay it early to stop the cost. An advance collects the same total whether sales are strong or weak, and collecting it faster rarely reduces that total.
A line is reviewed when it is opened and again at renewal; an advance is reviewed when it is offered. Those are differences in process, not in cost; set both side by side in total dollars for the amount and period actually needed.
How Does Revenue-Based Financing Work When Sales Slow Down?
Revenue-based financing, as the term is usually used, is paid back as a percentage of revenue, often monthly, up to a set total or cap. When sales slow, the payment falls; when they pick up, it rises. Like an advance, the total is fixed in advance; unlike many advances, the payment may be based on all revenue rather than card sales alone.
When sales slow, both stretch out the period of collection or payment. Neither reduces the total. A restaurant that expects a long slow stretch should ask how each product handles it, including whether a reconciliation is available if a fixed daily debit is used.
An Invented Advance and an Invented Loan, Set Side by Side for One Kitchen
Illustration only, invented figures: a Kanawha County, WV restaurant needs $20,000 for four months. It is offered an advance priced with an invented factor of 1.4 and a 10% holdback; it averages $1,800 a day in card sales, so about $180 a day is collected, for about 156 days of card sales. The advance costs $8,000 (our arithmetic).
In the same invented case, drawing $20,000 on a line of credit at an invented annual rate of 13% for four months costs about $867 in interest (our arithmetic, simple monthly interest), and a 12-month working capital loan at an invented annual rate of 14% has payments of about $1,795.74 a month and costs about $1,549 in total.
The three are not identical: the line requires approval and renewal, the loan runs a full year, the advance follows card sales. But the dollar figures make the comparison concrete. The working capital page covers the loan option.
Questions to Ask Before Signing a Card-Sales Agreement
- What is the net amount received, after any fees taken out at the start?
- In dollars, how much will the provider collect in total?
- Is collection a fixed holdback of card sales, or a fixed daily or weekly debit?
- If a fixed debit, how is a reconciliation requested when sales drop?
- Does collecting early reduce the total?
- What happens if the restaurant changes card processors or closes for repairs?
- Does the agreement restrict taking other financing while it is outstanding?
County Business Patterns counted 347 restaurants and other eating places with employees in Kanawha County, WV in 2023. The restaurant loans page covers the other funding types a kitchen can weigh.
By Brookharbor Lenders · Updated
