Merchant cash advance agreements are structured differently from traditional loans, and one of the terms that confuses business owners most is the “holdback percentage.” Understanding how it works — and how it interacts with your daily sales — is essential before agreeing to this type of financing.
What a Holdback Percentage Actually Is
With a merchant cash advance, a funding provider purchases a portion of your future receivables in exchange for an upfront lump sum. Rather than fixed monthly payments like a conventional loan, repayment happens through a holdback: an agreed-upon percentage of your daily or weekly card sales (or, in some structures, total revenue) that’s automatically remitted to the provider until the advance is repaid.
How the Percentage Is Set
Holdback percentages are typically set based on the business’s sales volume, industry, and risk profile, and can vary meaningfully from one agreement to the next. A higher holdback percentage generally means faster repayment but a larger daily draw on cash flow, while a lower percentage stretches repayment out but leaves more daily revenue in the business.
Why Repayment Amounts Fluctuate
Because the holdback is calculated as a percentage of sales rather than a fixed dollar figure, the actual amount remitted changes with your revenue. On a strong sales day, more is withheld; on a slow day, less is withheld. This structure is often marketed as a benefit during slower periods, since payments scale down along with revenue rather than staying fixed regardless of how the business is performing.
How Holdback Relates to Total Cost
The holdback percentage determines the pace of repayment, but it’s separate from the factor rate, which determines the total amount owed. Business owners sometimes focus on the holdback percentage alone without factoring in the factor rate, which can lead to confusion about the true cost of an advance. Reviewing both figures together, alongside the estimated repayment timeline, gives a clearer picture of what an advance will actually cost the business.
What to Ask Before Agreeing to a Holdback Structure
Before signing, it’s worth confirming exactly how the holdback is calculated (daily sales, weekly sales, or total revenue), whether there’s a reconciliation process if actual sales differ significantly from projections, and how the provider verifies your sales figures. Businesses with inconsistent or seasonal revenue should pay particular attention to how a fixed holdback percentage might affect cash flow during their slower months, and may want to compare the structure against alternatives such as a working capital loan or business line of credit, which typically use fixed payment schedules instead.
Frequently Asked Questions
Is the holdback percentage the same as the interest rate?
No. The holdback percentage controls how quickly you repay by determining the daily or weekly draw from sales; the total cost of the advance is separately determined by the factor rate applied to the amount advanced.
Can the holdback percentage change during the term?
Generally, the holdback percentage is fixed in the original agreement, though it’s important to review the specific contract terms, since structures can vary by provider.
What happens if my sales drop significantly?
Because the holdback is based on a percentage of sales rather than a fixed amount, a drop in sales typically reduces the dollar amount withheld, though total repayment will take longer as a result.
Curious whether a merchant cash advance or another funding structure fits your business better? Apply with Fundmerica to compare your options.