Whether new to the revenue based financing, also called merchant cash advance industry, or a veteran who may train or manage others in the industry, we present to you a glossary of the most common terms in Revenue, MCA or even called Sales-Based Financing.
Some Merchant Cash Advance companies might keep a glossary for internal use only but we created this merchant cash advance glossary to benefit the whole industry and potential new entrants.
These aren't considered legal interpretations of any of the terms by any stretch, so please do not consider using any in legal documents unless consulting an attorney. Actually, in some examples, you might notice a little humor as working in the merchant cash advance industry is needed sometimes.
If you have any MCA terms or most used merchant cash advance acronyms that we may have missed, leave a comment below or contact us. The merchant cash advance glossary is to be shared with your coworkers and mca industry colleagues far and wide.
ACH - stands for Automated Clearing House. which is the way transactions are processed between banks, typically taking 1-2 days.
ADB - Average Daily Balance, a key metric that is calculated when underwriting bank statements.
Broker - a sales representative that sells business financing products such as MCAs, loans and lines of credit.
Buyer - in a mca contract the buyer is the funding company who is buying future receivables from the seller.
Buy Rate- The factor rate that a funder will go no lower than and the broker is at zero commission.
Ex: broker says to a funder, "I have an offer with a lower buy rate, can you drop your rate BUT I'm still going to upsell 15 points??"
CC Split - Credit Card Split, is a merchant cash advance where the structure of paying back the money is in agreeing to split the gross sales from credit card processing to a fixed % that goes to the buyer and seller of the future receivables. This is typically used when there is a high volume of credit card sales when compared to regular bank deposit revenue. This is not a loan.
Clawback - when a commission is required, per ISO agreement, to be paid back from the broker because of a default by the merchant within agreed-upon time.
Ex: Funder," Hi Joe, your 100K deal that funded last week which you said the guy was a perfect payer closed his bank account and won't pay, so we are going to have to clawback the $10k commission."
COJ - Confession Of Judgement, is a written agreement, signed by the
defendant(merchant), that accepts the liability and amount of damages that was agreed on, specifically used in only certain states in case of a default on a merchant cash advance
Ex: Almost everyone rejoiced when COJs were banned in NY besides certain funding companies who depended on them.
Debt Service - The total outstanding debt payments that a business is obligated to pay back.
Default - when a merchant violates their contract with their funding company. Terms of default vary by the funder.
Double Funding - typically used in the same manner as stacking(see below), but many think of this as one mca funding right after another mca funding, typically the same day to 7 days after an advance is deposited. The first MCA funder does not know about the second, and this process can be done for several positions after. This can be deceiving and can be considered a default of contract as well as a clawback of commission if the same broker proved to be the source of the second funding.
Early Payoff Discount - an amount that is calculated at the time of contract to reduce the cost of the advance if paid early according to the terms disclosed.
Factor Rate- the cost applied to a merchant cash advance or other factoring product where the amount of money approved to advance is multiplied by this cost or discounted in the case of a mca.
Ex: Factor rates at zero commission range from 1.05 to 1.49.
Funder - a business funding company that provides a Merchant Cash Advance, which is not a loan, and therefore not a lender.
Holdback - is the % amount set in a credit card split agreement in which that amount goes to the buyer of receivables.
Ex: A 15% Holdback(HB) would mean the funder is getting 15% of the total credit card sales in each batch.
ISO - Independent Sales Organization, which is a company that operates to sell MCAs along with other loan products and employs brokers and other personnel. ISOs are essentially the same thing as business loan brokers and commercial finance brokers how ISO is referring to a whole company whereas a broker refers to an individual. The use of the term ISO originated in the card payments space. Learn More
Lockbox- 3rd party bank account where funds from payment processor are held until properly distributed to the merchant and to the lien holder.
Merchant Cash Advance (MCA) - the sale of future receivables at a discount(by upfront payment) where the payback is either by a set daily/weekly ACH payment or by splitting the business owners credit card sales at a fixed percentage. It is not a loan.
Ex: Business owner needs $100,000, he's offered an MCA at a 1.30 factor rate over 10 months, meaning the total payback is $130,000. 21 payments per month totaling 210 daily payments at $619 each payment.
Payoff Letter - a letter from a funding company that provides the amount for the merchant to pay the balance in full.
Ex: "The merchant says the other funder won't give him the letter, can you fund him anyway??"
Payback Months - a term used when requesting the bank statements from the previous year that would be coming up during the payback period of the advance being offered.
Percentage of Gross - the percentage of total relevant debt service payments paid monthly divided by the gross sales deposits per month.
Ex: A business owner wants $50,000, has gross revenue of $50,000/month, and the MCA funder approves a %10 Percentage of Gross equaling $5,000 worth of debt total payments per month the merchant can afford to make.
Points - are the percentage number that is added to the factor rate for a commission paid to a broker. 1 point is 1% of the total advanced amount. A point can also be added by the funder to increase the Buy Rate.
Position - derives from the legal place in the hierarchy a debtor has to collect according to any UCCs filed on a business. In everyday use in MCA, it's known as an advance that a merchant has where 1 MCA would be 1 position, 2 mcas would be 2 positions, and so on.
PSF - Professional Service Fee, a fee some brokers charge merchants for their service.
Ex: Most funders won't allow an exorbitant PSF fee, which could be 3-5%
Purchase Price - is the advance amount
Purchase Amount - is the total payback amount
Remittance - The percentage of sales that are being withdrawn from the business bank account daily or weekly. There are other synonymous terms like 'pull'.
Renewal - When a merchant takes another advance from the same funding company at a point when eligible, typically about 50% of the way paid in. Renewals are where the most profit is made.
Seller - is the merchant who is selling his future receivables to the buyer(the funder).
Sell Rate - The total factor rate at which the broker has their commission added in, which would also be the rate reflected in the contracts.
Stacking - Refers to the funding of an additional advance behind one or more already existing advances. Often times this can be considered a default to the existing merchant advance agreement (not the same as double funding).
Stips - or Stipulations, are items that are required to close on the advance. They include documents and other key information like proof of ownership.
Ex: "Why so many stips? I have another offer that hardly had any stips"
Syndication- is a program that direct lenders offer to some ISOs to invest their own capital into their own cash advance submissions.
Term - this is not the correct word to use for MCA's when describing the scheduled time in months or payments in which the client has to pay back the mca. This would be the terminology used for a loan, that when combined with other words like loan, interest rate, etc., could be used in court to say an MCA Funder is actually offering loans.
Turn - the scheduled time in months or payments in which the client has to pay back an MCA
True-up - its the reduction of payment amounts being made to the funding company to more accurately reflect the ability to pay back based on sales, which is required for all MCA products.
UCC - the Uniform Commercial Code has been called “the backbone of American commerce”. Its a comprehensive set of laws governing all commercial transactions in the United States. A UCC filing is used to stake a place in line to collect a debt.
Usury - is the act of lending money and requiring repayment at an exorbitant interest rate above the legal cap
ZBL - Zero Balance Letter, typically requested in order to use for more credit opportunities and confirm the balance is zero.
Ex: We will need a ZBL from 'ABC Funder' before we can complete funding"
