How merchant fee structures work

Revenue-based lending (RBL) repays a capital advance by taking a percentage of your gross sales (a merchant holdback) or by applying a factor to payments tied to receipts. Instead of fixed monthly principal and interest, payments rise and fall with revenue: when sales climb you pay more, and when sales fall you pay less. That flexibility can ease short-term cash strain but makes the overall cost dependent on sales patterns and contract terms.

Common merchant fee types and terms to watch

  • Percentage holdback: A fixed percentage (for example, 5–15%) of daily/weekly card sales is remitted to the lender until the agreed total repayment is reached.
  • Factor rate / repayment cap: Some agreements set a multiple of the original advance (e.g., 1.2–1.5x) rather than an interest rate. Multiply the loan by the factor to see total owed.
  • Minimum remittance or fixed draw: A floor payment the lender can take even in low-revenue periods.
  • Reserve or rolling reserve: A percentage of sales withheld and released later; can tighten cash flow.
  • Fee amortization and reconciliation: Check how the lender reconciles returns, refunds, and chargebacks to avoid unexpected shortfalls.

Note: merchant cash advances (MCAs) are a related product that often uses factor rates and daily remittances; regulators and consumer groups advise careful comparison (see CFPB guidance).

Quick example (hypothetical)

A café takes a $50,000 revenue-based advance with a 1.25x factor and a 7% daily holdback. Total repayment = $62,500. If daily card sales average $1,000, the lender collects $70/day (7%), so the payback period will be ~893 days (62,500 ÷ 70), longer or shorter depending on actual sales. This simple model shows how sales volume affects total time to repay and effective cost.

How to compare cost and cash-flow impact

  • Convert to a cash-flow model: run best-, expected-, and worst-case sales scenarios for 12–24 months.
  • Compute effective cost: because RBL often lacks an APR, annualize total repayments for a comparable rate under typical sales assumptions.
  • Compare to alternatives: term loans, lines of credit, or venture capital can have different cash-flow profiles and costs.

Who benefits and who should be cautious

Best-fit: businesses with predictable, stable card sales and strong margins (e.g., recurring services, established retail). Good for growth when you want flexible repayments tied to revenue.
Be cautious: highly variable, low-margin, or loss-making businesses may find merchant fees compress cash and amplify risk during slow seasons.

Negotiation levers and red flags (in my practice)

In my work advising small businesses, the most effective negotiation points are lowering the percentage holdback, adding a cap on daily minimums, shortening the repayment factor, and obtaining transparent reconciliation rules with your POS provider. Watch for:

  • Vague language about refunds/chargebacks
  • Uncapped minimum payments
  • Personal guarantees or blanket liens on accounts receivable

Practical steps before signing

  1. Request sample monthly remittance schedules under several revenue scenarios.
  2. Ask for plain-English examples of how refunds and chargebacks affect payments.
  3. Negotiate a conversion to a term loan if you outgrow the product.
  4. Get legal or financial review focused on covenants, reserves, and default triggers.

Related resources on FinHelp.io

Authoritative sources and further reading

Professional disclaimer: This article is educational and not personalized financial advice. For decisions about financing terms for your business, consult a licensed financial advisor or attorney. Information is current as of 2025.