Annual Percentage Rate (APR) vs. Cost of CapitalAPR expresses borrowing cost as an annualized percentage. Cost of capital, as used in merchant cash advance agreements, is the fixed dollar amount the business agrees to pay for the funding. They answer two different questions: APR asks what the cost looks like on an annualized basis; cost of capital asks how many dollars the funding will cost in total.
Merchant cash advances are not structured like amortizing bank loans, so their stated pricing is typically presented as a factor rate and total repayment rather than a traditional interest rate. Because repayment speed can vary, converting an MCA into an annualized rate can produce a very different percentage depending on how quickly the advance is repaid.
Why it matters: A business owner comparing two offers should look beyond a single percentage and compare the total repayment, payment frequency, expected repayment period, and effect on cash flow. For a broader comparison, see
what’s the difference between a merchant cash advance and a business loan.
Average Daily Balance
Average daily balance is the average amount of money remaining in a business bank account over a defined period. It is generally calculated by adding the account’s ending balance for each day and dividing by the number of days reviewed.
Why funders look at it: Revenue shows how much money comes in; average daily balance helps show how much liquidity the business actually keeps on hand. A business with strong deposits but consistently near-zero balances may present a different cash-flow picture than one with similar revenue and a healthy operating cushion.
Bad Credit Financing
Bad credit financing refers to business funding options available when the owner’s personal credit score would make conventional bank financing difficult to obtain. Merchant cash advances can fall into this category because underwriting typically places more weight on business revenue, deposit activity, and cash flow than on credit score alone.
Important distinction: A low credit score does not necessarily mean approval is automatic or irrelevant. It may still affect the amount offered, pricing, or other terms. See
business funding with bad credit in Canada for a fuller explanation of what alternative funders review.
Business Credit Profile
A business credit profile is the credit record attached to the company itself rather than to its owner personally. Commercial credit bureaus can track items such as payment history, trade credit, outstanding obligations, and other indicators of how the business has handled credit.
Why it matters: A business owner can have a strong personal credit score and a thin business credit file, or the reverse. The two records are separate and may be evaluated differently depending on the funding product. That distinction is covered in more detail in 2M7’s
bad credit funding guide.
Cash Flow Underwriting
Cash flow underwriting is an approval method that focuses on the money moving through a business rather than relying primarily on collateral or a high credit score. Funders typically review bank deposits, monthly revenue, account activity, recurring obligations, and signs of cash-flow stress.
Why it matters: For a business with healthy sales but imperfect credit, cash flow underwriting can provide a more current picture of the company’s ability to support funding. The
bad credit funding guide explains the primary factors alternative funders evaluate.
Cost of Capital
Cost of capital is the fixed dollar cost attached to a merchant cash advance. It is established when the funding is approved and, unlike interest on a traditional loan, is not recalculated each month on a declining principal balance.
Example: If a business receives $50,000 and the agreed cost of capital is $15,000, the total contractual repayment is $65,000 before any applicable early-payoff program. The key number for the business owner is therefore not only the amount received, but the total amount that must be remitted.
Why it matters: Cost of capital makes the dollar cost visible upfront. See the 2M7
merchant cash advance page for how 2M7 presents pricing and repayment terms before funding.
Daily Remittance / Weekly Remittance
Daily or weekly remittance describes how often a business sends payment toward an advance. Daily remittance spreads the obligation across business days; weekly remittance collects a larger amount less frequently. Either structure may use a fixed amount or a sales-linked amount, depending on the agreement.
Why it matters: Payment frequency can affect day-to-day cash management even when the total repayment is identical. A seasonal or project-based business may prefer a different cadence than a retailer with steady daily sales. 2M7’s
fixed and flex payment options explain the available structures.
Direct Funder vs. Broker
A direct funder provides the capital itself and manages the funding relationship directly with the business. A broker does not supply the capital; it submits an application to one or more third-party funders and is compensated when a transaction closes.
Why it matters: Knowing which one you are dealing with clarifies who is making the underwriting decision, who is providing the money, and whether another party is being paid to arrange the transaction. 2M7 is a
direct funder, not a broker.
Factor Rate
A factor rate is a decimal multiplier used to calculate the total repayment on a merchant cash advance. Unlike an interest rate, it is applied to the original funding amount rather than to a declining balance.
Formula: Total repayment = Funding amount × Factor rate
Example: $40,000 in funding at a 1.30 factor rate produces a total repayment of $52,000. The $12,000 difference is the cost of capital.
Why it matters: A lower factor rate generally means a lower total dollar cost, but the payment structure and expected repayment period still matter when evaluating affordability. 2M7’s factor rates typically fall between 1.18 and 1.48, depending on the funding amount, time in business, monthly revenue, and industry. The
bad credit funding guide explains how factor rates differ from bank interest rates.
Funding Agreement
A funding agreement is the contract that sets out the terms of a merchant cash advance. It should identify the amount funded, factor rate or cost of capital, total repayment, payment or holdback structure, payment frequency, and any other conditions attached to the transaction.
Why it matters: The funding amount is only one number in the agreement. A business owner should also understand exactly how much will be repaid, how often money will be collected, what happens if sales slow, and whether any early-payoff, default, or reconciliation provisions apply.
Holdback (Withholding Percentage)
A holdback is the percentage of daily sales remitted toward a merchant cash advance when repayment is tied directly to revenue. Because the percentage stays the same while sales change, the dollar payment rises on stronger sales days and falls on slower ones.
Formula: Daily remittance = Daily sales × Holdback percentage
Example: At a 12% holdback, $2,000 in daily sales produces a $240 remittance; $3,500 in sales produces a $420 remittance.
2M7 example: 2M7’s holdback rates typically range from 4% to 30% of daily sales, based on the funding amount, revenue, and industry. This sales-linked structure is what 2M7 calls its
“Pay as You Grow” model.
Invoice Factoring
Invoice factoring is a financing arrangement in which a business sells eligible unpaid invoices to a factoring company at a discount in exchange for faster access to cash. The transaction is tied to specific receivables rather than to the business’s overall future sales.
How it differs from an MCA: Invoice factoring monetizes money customers already owe the business. A merchant cash advance is generally underwritten against the business’s revenue and cash flow instead. Factoring is common in industries such as trucking, where payment can arrive well after fuel, payroll, and other operating expenses are due. See 2M7’s
trucking business funding page for a related funding comparison.
Line of Credit
A business line of credit is a revolving credit facility that allows a company to draw funds up to an approved limit, repay what it uses, and generally borrow again without applying for an entirely new facility each time. Interest is typically charged on the amount outstanding.
How it differs from an MCA: A merchant cash advance usually provides a defined amount of funding with a defined total repayment rather than an open revolving limit. Businesses that want recurring access to working capital but do not qualify for a traditional bank line may compare that structure with a
line of credit alternative.
Merchant Cash Advance (MCA)
A merchant cash advance is a form of business funding in which a company receives capital upfront in exchange for an agreed total repayment. Payments are commonly collected as a percentage of sales or as fixed daily or weekly remittances. Underwriting generally focuses heavily on business revenue and cash flow.
What makes it different: An MCA is priced using a factor rate or stated cost of capital rather than a traditional loan interest rate, and qualification can be faster because the decision is often based on recent business performance. Start with
what is a 2M7 merchant cash advance or 2M7’s explainer on
what is a merchant cash advance for the full structure.
Prepayment / Early Payoff Discount
Prepayment means paying the remaining merchant cash advance balance before the expected repayment period is complete. Whether that reduces the total amount owed depends on the agreement and the funder’s early-payoff policy.
2M7 example: 2M7 offers a 10% discount off the remaining balance when an eligible business pays off its advance early, the account is in good standing, and the payoff comes directly from the business rather than from another funder. See the
merchant cash advance page for the applicable early-payoff conditions.
Reconciliation / True-Up
Reconciliation, sometimes called a true-up, is a mechanism that adjusts remittances so they better reflect the sales percentage agreed to in the funding contract. It is most relevant when the business is making estimated or fixed withdrawals but the agreement is ultimately tied to actual revenue.
Why it matters: If sales fall materially, a reconciliation provision may allow the business to request that collections be adjusted to match actual performance. The exact process, eligibility, documentation, and timing depend on the funding agreement.
Revenue-Based Financing
Revenue-based financing is a broad category of business funding in which repayment is linked, directly or indirectly, to the company’s revenue. Instead of assuming that every month will look the same, the structure is designed around the cash the business is actually generating.
Why it can fit variable businesses: For seasonal, construction, or project-based companies, sales can fluctuate substantially from week to week. Revenue-linked payments can better reflect that pattern than a rigid payment amount. See 2M7’s
construction and trade business funding page for an industry example.
Same-Day Funding / 24-Hour Funding
Same-day or 24-hour funding means that approved capital can reach the business bank account within one business day after final approval and completion of required documentation. It does not mean every application is approved or that every transaction can be completed within 24 hours.
Why it can be faster: Alternative funders can often make decisions using recent bank statements and revenue data rather than the longer collateral, financial-statement, and committee processes associated with many conventional bank products.
Apply for funding to see the 2M7 process.
Split Funding
Split funding is a repayment method in which an agreed percentage of card sales is automatically diverted to the funder as transactions are processed. Instead of a separate bank withdrawal after the sale, the remittance is split off at or near the point of settlement.
Who it suits: This structure is most practical for businesses with substantial debit or credit card volume because repayment naturally tracks card-based sales. Businesses paid mainly by invoice, cheque, or bank transfer generally require a different collection method.
Stacking
Stacking means having more than one merchant cash advance outstanding at the same time, usually from different funders. Each additional position adds another repayment obligation against the same business cash flow.
Why it matters: A second or third advance can make the business’s total daily or weekly remittance materially heavier even if each agreement looked manageable on its own. Before adding funding, the business should evaluate the combined payment burden rather than reviewing the new offer in isolation.
Time in Business
Time in business is the length of operating history a funder uses as one indicator of stability. It may be verified through bank activity, incorporation or registration records, tax documents, or other business records.
2M7 requirement: 2M7 requires a minimum of three months in business. Time in business is only one part of the approval decision and is considered alongside other
qualification criteria.
Underwriting
Underwriting is the process a funder uses to decide whether to approve a business for funding and, if approved, on what terms. For merchant cash advances, the review commonly emphasizes bank statements, monthly revenue, deposit consistency, time in business, existing obligations, and industry risk.
Why it differs from bank underwriting: Alternative funding can place less weight on collateral and personal credit than many conventional lending products, although those factors may still be considered. See the
four primary factors alternative funders evaluate for a closer look at the approval process.
Working Capital
Working capital is the money a business uses to fund everyday operations: payroll, inventory, rent, supplier payments, marketing, repairs, and other short-term expenses. In accounting terms, net working capital is often expressed as current assets minus current liabilities; in funding conversations, the phrase is also used more broadly to describe operational liquidity.
Why businesses finance it: A profitable company can still face a working-capital gap when cash goes out before customer payments come in. Short-term funding is often used to bridge that timing mismatch. See 2M7’s
line of credit alternative for one approach to recurring liquidity needs.
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