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Last week I wrote about picking the right merchant advance company. In a growth industry like this, there’s always a few “not so qualified” companies that enter the market, only to be out of business in a couple years. You need to check out the Company, get references from existing clients, and find out the history of the shareholders.

You also need to be careful and ask lots of questions about how you repay the merchant advance. All companies get repaid on a daily basis using a small percentage of credit/debit card sales. This continues every day until total advance amount (plus fees) has been recovered. It’s a great process because the repayment amount fluctuates daily with the sales trend of the business.

However, there are three very different methods that service providers use to get their money repaid. One of them should be avoided at all cost, another is not bad if you have the right merchant processor, and the third is the easiest and least disruptive to your business.

Repayment using the lockbox

If the word “lockbox” comes up in the initial phone conversation with your provider you should just hang up. The lockbox system of repayment requires you to open a trust account and instruct your processor to divert 100% of your credit and debit card sales to this account. From there, the provider takes their share and then sends the remainder to your bank account. Not only is this a huge hassle to set up (and switch back after the advance is paid) it can tie up your money for a couple days. The next system is much better but has drawbacks….

Split funding

Some providers have developed relationships with merchant processors that allows them to “split” your POS sales. The merchant advance company gets their small percentage of your daily sales sent directly to them from the POS processor. It’s a great system if you have the right processor. However, if the merchant advance provider doesn’t have a relationship with your existing POS processor they will require you to switch companies. This means new terminals in your store, re-training your staff, new bank accounts, and new processor contracts to negotiate – too much work.

Direct Debit

This is by far the easiest and most convenient system of repayment. All you need to do is set up a pre-authorized debit agreement with your bank and set up your on-line reporting system with your POS processor.  With this system, your merchant advance provider logs on to your “read only” reporting system from your POS processor to determine yesterdays sales volume. From here they calculate their share of daily sales and automatically debit your bank account. There are no fees to set this up – quick, easy, no new bank accounts or POS processor required.

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