Split funding is the preferred method of most lenders to collect their return on investment. When a merchant decides to go with a lender he has three different methods of paying back the advance (depending on the lender and the cash flow situation of the merchant): Split funding, ACH and Lockbox. For an in-depth discussion of ACH vs. Lockbox click here.
The preferred method of collecting credit card receivables is through the split funding method. This is simply the fastest way for the merchant to receive the advance, to have his credit card receivables post in his account, and for him to keep track of his finances. It is also the easiest and most secure method for the lender to retrieve the funds from the merchant.
In a split funding method the merchant switches over his processor to the lender’s preferred merchant processing company. Typically, a lender can beat or at least match the merchant’s current rates. Once the merchant has switched over they usually like to see that he has batched out and processed for one or two days and is processing a proportional amount of money to what he had been in his previous statements.
After this, assuming the underwriting processes is complete, the lender will either ACH or wire the money to the merchant. The merchant will process credit card as usual and will batch out of his machine. Once he batched out, the processing company will simply “split” the funding. The funds are divided into respective percentages before they post to the merchant’s bank account. For example if a merchant processes $1,000 daily, and has a 20% holdback percentage with his lender, then when he batches out, $200 will go to pay off the advance, and $800 will post in the merchants account.
To read more about processing companies click here!