MCAbox Learning Center

Merchant cash advance terms

Clear explanations of the terminology used by merchants, brokers, underwriters, and funding companies—from ACH payments to zero balance letters.

46 MCA terms and definitions

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MCAbox Learning Center

MCA terms and definitions

Showing 46 of 46 terms

ACH (Automated Clearing House)

An electronic funds transfer system used to withdraw payments directly from a merchant's business bank account. In MCA, ACH debits are the most common repayment method — funders pull a fixed daily or weekly amount until the advance is fully repaid.

Average Daily Balance (ADB)

The average amount of money sitting in a merchant's business bank account on any given day. Funders use ADB as a key underwriting metric — a healthy ADB relative to revenue signals that the merchant can sustain daily or weekly payments without running dry.

Broker / Closer

An inside sales representative who acts as the middleman between the merchant (business owner) and the funder. The broker's job is to match the merchant with the right funding offer, explain terms, and guide the deal to closing. Brokers earn commissions (points) on funded deals.

Buyer

The funding company that purchases a merchant's future receivables at a discount. In every MCA transaction, the merchant is the "seller" and the funder is the "buyer." The buyer advances capital upfront in exchange for the right to collect a larger amount from future sales.

Buy Rate

The funder's base factor rate — the lowest rate at which they're willing to fund a deal. The difference between the buy rate and the sell rate (what the merchant actually sees) is where broker commissions come from.

Clawback

When a funder recovers a previously paid commission from an ISO or broker. This typically happens if a merchant defaults within 30 days of funding. Clawback provisions are standard in most ISO agreements and protect the funder from paying commissions on deals that immediately go bad.

Closing Fee / Contract Fee

A fee charged by the funder and deducted directly from the funding amount before the merchant receives their capital. For example, on a $50,000 advance with a $1,500 closing fee, the merchant receives $48,500. These fees vary by funder.

Confession of Judgment (COJ)

A notarized legal document signed by the merchant that grants the funder an automatic court judgment in case of default — without requiring a trial. COJs give funders a fast path to asset recovery but are controversial and banned in several states.

Credit Card Split / CC Split

A repayment structure where a fixed percentage of the merchant's daily credit card processing volume is automatically routed to the funder. Unlike fixed ACH payments, split amounts fluctuate with the merchant's actual sales — slower months mean lower payments.

Debt Service

The total debt burden a merchant carries after receiving an advance, including all MCA payments plus any other fixed obligations like rent, loans, or credit cards. A merchant's debt service ratio — total monthly obligations divided by monthly revenue — is a critical underwriting metric.

Default

When a merchant violates the terms of their merchant agreement — most commonly by failing to maintain sufficient bank balances for ACH withdrawals, closing their bank account, or diverting revenue. Defaults trigger the funder's collection process and may involve COJ filings or UCC enforcement.

Double Funding / Stacking

When a merchant secretly arranges two funders to fund on the same day without either funder's knowledge. This is considered fraud in the MCA industry and violates virtually every merchant agreement. Funders detect stacking through bank statement analysis and UCC filing searches.

Early Payoff Discount

A reduction in the total payback amount offered to merchants who repay their advance ahead of schedule. Not all funders offer early payoff discounts, and terms vary — some discount the remaining balance by a fixed percentage, others prorate based on time elapsed.

Factor Rate

The multiplier that determines the total payback amount on an MCA. Expressed as a decimal (e.g., 1.35), the factor rate is multiplied by the advance amount to calculate total repayment. A $50,000 advance at a 1.35 factor rate means $67,500 total payback. Factor rates typically range from 1.10 to 1.50 depending on risk.

Funder

A company that provides merchant cash advances by purchasing a merchant's future receivables. Funders underwrite deals, set terms, and collect payments.

Funding Call

A phone call conducted by the funder's underwriter with the merchant before funding is approved. The purpose is to verify business details, confirm the merchant understands the repayment terms, and flag any concerns. Most funders require a successful funding call before releasing capital.

Holdback

The percentage of a merchant's daily revenue that goes toward MCA repayment. Calculated by dividing the total daily payment obligation by average daily revenue. Most funders consider holdback under 15% healthy, 15-25% moderate, and over 25% aggressive. Deals exceeding 25% holdback carry significantly higher default risk.

ISO (Independent Sales Organization)

A company that markets and sells MCA products to merchants on behalf of funders. ISOs operate independently but have formal agreements with one or more funders. They earn commissions on funded deals and may manage the full sales cycle from lead generation to closing.

ISO Agreement

A formal contract between a funder and an ISO that defines the relationship — including commission structures, clawback terms, exclusivity clauses, compliance requirements, and expectations for both parties. Every ISO should carefully review these terms before signing.

Lockbox

A third-party bank account that intercepts funds from a merchant's payment processor before they reach the merchant's operating account. The lockbox holds funds temporarily, routes the funder's share to repayment, and releases the remainder to the merchant. Used primarily in credit card split arrangements.

Merchant Cash Advance (MCA)

The purchase of a merchant's future receivables at a discount. The funder advances a lump sum upfront, and the merchant repays a fixed total amount through daily or weekly ACH debits or a percentage split of credit card sales. MCAs are not loans — they're structured as commercial transactions, which exempts them from many lending regulations.

Merchant Interview

A conversation between the funder's underwriting team and the merchant, typically conducted by phone before funding approval. The interview verifies business operations, confirms the merchant understands repayment terms, and surfaces potential risk factors that may not appear in documentation.

Payoff Letter

An official document issued by a funder on company letterhead that states the current remaining balance on a merchant's advance. Payoff letters are required when a merchant is consolidating positions — the new funder needs to verify exactly how much is owed to each existing funder before proceeding.

Payback Months / Bank Statements

The merchant's bank statements (typically 3-4 months) submitted during the application process. Funders analyze these to assess monthly revenue, average daily balance, existing MCA payments, NSF (non-sufficient funds) occurrences, and overall cash flow health.

Percentage of Gross

The percentage of a merchant's total (gross) sales used to calculate the holdback or payment amount in a credit card split arrangement. A higher percentage means faster repayment but greater cash flow impact on the merchant.

Points

The commission rate paid to brokers or ISO reps on funded deals, expressed as a percentage of the advance amount. For example, 10 points on a $50,000 deal equals a $5,000 commission. Points are the spread between the funder's buy rate and the sell rate presented to the merchant.

Position

The number of active MCA advances a merchant carries simultaneously. A merchant with one advance is in "1st position," two advances is "2nd position," and so on. Higher positions carry more risk because the merchant's revenue is split across more obligations.

Processor

A member of the funder's team who performs initial review of a merchant's application and documentation. The processor checks for completeness, flags obvious risk indicators, and prepares the file for the underwriter's deeper evaluation.

PSF (Professional Service Fee)

A fee charged by a broker to the merchant for their services in securing MCA funding. PSFs are separate from the funder's closing fee and are typically deducted from the funded amount. Not all brokers charge a PSF — some rely solely on points from the funder.

Purchase Price

The advance amount — the actual dollar figure the merchant receives (before any fees are deducted). Also called the "funding amount" or "advance amount."

Purchase Amount / Payback

The total amount the merchant owes back to the funder — calculated by multiplying the advance amount by the factor rate. On a $50,000 advance at 1.40, the purchase amount (payback) is $70,000.

Remittance / Pull / Payment

The scheduled withdrawal of funds from a merchant's bank account to repay the advance. Remittances are typically daily (Monday-Friday) or weekly, with the amount determined by the total payback divided by the number of payments in the term.

Renewal

A new advance issued to a merchant after their current advance is repaid or partially paid down. Renewals are common in MCA — merchants with good payment history often receive renewal offers with potentially better terms. Some funders allow renewals once 50-60% of the existing balance is paid.

Seller

The merchant — the business owner selling their future receivables to the funder (buyer) in exchange for an upfront advance.

Sell Rate

The factor rate presented to the merchant in the agreement. The sell rate is higher than the buy rate — the difference is the broker's commission (points). If the buy rate is 1.25 and the broker adds 10 points, the sell rate is 1.35.

Stacking

Taking an additional MCA advance while an existing advance is still being repaid. Unlike double funding (which is fraudulent), legitimate stacking happens with the knowledge and consent of all parties. Many funders specialize in 2nd, 3rd, or higher positions.

Stips / Stipulations

Documents and conditions required by the funder before a deal can close. Common stips include bank statements, tax returns, driver's license, voided check, business lease, and proof of ownership. Stips vary by funder and deal risk level.

Syndication

When multiple funders or investors each contribute a portion of the advance amount, sharing both the capital outlay and the risk. Syndication allows funders to participate in larger deals without bearing the full exposure, and lets syndicators diversify their MCA portfolio.

Term

The estimated time period over which the merchant will repay the advance, based on the total number of payments. A deal with 126 daily payments has roughly a 6-month term. Terms in MCA are estimates — since some structures adjust with sales volume, actual repayment time may vary.

True-Up

An adjustment to the merchant's payment amount to better reflect their actual revenue. If a merchant's sales drop significantly, a true-up reduces the daily payment to maintain a sustainable holdback percentage. True-ups protect the merchant from being overleveraged during slow periods.

UCC (Uniform Commercial Code)

A set of laws governing commercial transactions in the United States. In MCA, funders file UCC liens against a merchant's business assets to secure their position. UCC filings are public record and alert other funders that an existing advance is in place — a critical tool for preventing unauthorized stacking.

Underwriter

The person responsible for evaluating each merchant's application, assessing risk, and determining whether to approve funding and at what terms. Underwriters analyze bank statements, credit reports, industry risk, existing positions, and overall business health before making a decision.

Underwriting

The process of evaluating a merchant's risk profile before approving an advance. Underwriting considers factors like monthly revenue, bank balance trends, credit score, time in business, industry type, and existing debt obligations.

Up-Sell

The range of additional points a funder allows a broker to add on top of the buy rate. If a funder's buy rate is 1.25 with a 15-point up-sell, the broker can present the deal to the merchant at up to 1.40 and keep the spread as commission.

Usury Law

State laws that cap the maximum interest rate a lender can charge. Because MCAs are structured as purchases of future receivables rather than loans, they generally fall outside usury law restrictions — though this legal distinction is increasingly being challenged in courts.

Zero Balance Letter

An official document from a funder confirming that a merchant's advance has been fully repaid with a $0 remaining balance. Zero balance letters are required when a merchant is seeking new funding — the new funder needs confirmation that previous positions are closed.

MCAbox provides these explanations for general educational purposes. Funding structures, requirements, and contract language can vary by provider and transaction.