With a true percentage holdback, a Sandusky, OH merchant remits less when card sales drop and more when they climb, while the total owed stays the same and only the timeline changes. A fixed daily debit does not move with sales. The contract decides which one a business has, so read it before card sales slip.
A worked comparison of a true percentage holdback and a fixed daily debit across eight uneven weeks of card sales, for Sandusky, OH shops, restaurants and taverns.
How a holdback percentage follows card sales
A merchant cash advance is not a loan. The provider buys a fixed amount of the business's future card sales at a discount, pays the business a smaller sum today, and collects the purchased amount by taking a set percentage, the holdback, out of card deposits until the full amount has been delivered.
Illustration only, invented figures: a shop takes $18,000 and sells $24,120 of future card sales, a 1.34 factor, so the advance costs $6,120 in this example. With a 9% holdback, a $10,000 week of card sales sends $900 to the provider and a $5,000 week sends $450. Those amounts come out before the money reaches the operating account, so the account sees card deposits net of the holdback.
Because the share is fixed and the dollars are not, the holdback rises and falls with the register. Cash sales, checks and invoices paid by bank transfer stay outside it unless the contract also sweeps the bank account.
For scale, County Business Patterns for 2023 listed 301 retail trade and 266 accommodation and food services establishments with paid employees in Erie County, OH. ZIP 44870 had 217 retail and 165 accommodation and food services establishments in the 2023 ZIP Code Business Patterns.
Fixed daily debits vs a true percentage holdback
An advance contract may not take a share of each card batch at all. It can instead set a fixed debit from the bank account every business day, sized from an estimate of sales. In this example the provider estimates $10,500 of weekly card sales, takes 9% of that, and debits $189 a day, five days a week, or $945 a week.
| Week | Card sales | True holdback | Fixed debit | Fixed debit as share of sales |
|---|---|---|---|---|
| Week 1 | $11,200 | $1,008.00 | $945.00 | 8.4% |
| Week 2 | $10,600 | $954.00 | $945.00 | 8.9% |
| Week 3 | $9,800 | $882.00 | $945.00 | 9.6% |
| Week 4 | $6,100 | $549.00 | $945.00 | 15.5% |
| Week 5 | $5,400 | $486.00 | $945.00 | 17.5% |
| Week 6 | $7,900 | $711.00 | $945.00 | 12.0% |
| Week 7 | $10,900 | $981.00 | $945.00 | 8.7% |
| Week 8 | $11,600 | $1,044.00 | $945.00 | 8.1% |
Across the eight weeks in this example the true holdback sends $6,615.00 and the fixed debit sends $7,560.00, $945.00 more. The gap is not spread evenly. In the $5,400 week the holdback takes $486, while the fixed debit still takes $945, which is 17.5% of that week's card sales.
What happens to remittance when sales drop
With a true percentage holdback, lower sales mean smaller remittances and a longer timeline, and the purchased amount does not change. In this example, at $10,500 of card sales every week the $24,120 is delivered in about 26 weeks. If sales settle at $6,000 a week, the holdback falls to $540 and the same amount takes about 45 weeks.
With a fixed debit, the dollars leave on schedule whatever the register did. A contract can include a reconciliation clause that lets the business ask for the debit to be adjusted to its actual sales for a past period. Whether the contract has one, how a request is made, and which statements the provider wants are all in the contract, not in a sales conversation.
- The holdback percentage, and whether it is taken from card batches or debited from the bank account.
- The debit amount and frequency, if it is fixed.
- Any reconciliation clause, the notice it requires and the records it asks for.
- What the contract treats as a default, such as changing card processors or closing the account the debits come from.
When sales dips are the problem rather than a one-time purchase, working capital with a set payment, or a line of credit drawn only in the thin weeks, can be compared with an advance in dollars before anything is signed.
Reading the contract before taking a second advance
A second advance on top of the first stacks two holdbacks on the same deposits. Illustration only, invented figures: with the first advance at 9% and a second at 8%, a $9,000 week of card sales sends $1,530 to two providers, and $7,470 is left for payroll, stock and rent in this example.
Before a second advance, the first contract is the document to reread. It can restrict taking another advance against the same receivables, and the second provider can ask for the first contract and a payoff letter. Questions worth asking on the call:
- How much of the first purchased amount is still outstanding, in dollars, as of today?
- Does the first contract allow a second advance, and on what terms?
- Would the second advance pay off the first, and if so, how much of the new money actually reaches the account?
- What would both holdbacks together take from an average week, and from the slowest recent week?
Palmwater Lending Group can talk through the numbers by phone and pass a request to funding partners, which set their own terms. The Palmwater blog also compares revenue-based funding with a cash advance for shops, and the request form starts a request.
By Palmwater Lending Group · Updated
