What is a holdback, and how does it decide your term?

What it is

A holdback is a percentage, applied to your card settlements or bank deposits, that is diverted to the funder until the purchased amount is collected in full. It is not a payment amount. It is a share.

Illustrative only — a 12% holdback on card sales of $3,000 a day collects $360 that day. On a slow day of $1,500 it collects $180.

How it sets the term

The total is fixed by the factor. The holdback determines the speed.

Suppose $60,000 is advanced at a 1.35 factor, so $81,000 is to be collected, with a 12% holdback.

At $90,000 of monthly card volume the holdback delivers $10,800 a month, and $81,000 clears in about 7.5 months. Solving for the monthly rate on that payment stream and annualising gives 91.3%.

At $65,000 of monthly volume it delivers $7,800 a month, and the same $81,000 takes about 10.4 months. The annualised cost falls to 67.8%.

Same dollars, same contract. A weaker year makes the facility look cheaper on an annualised basis and takes three months longer to escape.

Holdback is not the same as a fixed daily debit

The distinction matters more than any number in the contract.

Ask three questions: is the collection a percentage or a fixed amount; if fixed, what triggers a reconciliation and who decides; and is there a fee to request one.

Sizing it against a bad month

Illustrative only — card volume averaging $90,000 a month that falls to $48,000 in January.

Under a true 12% holdback, January collects $5,760 instead of $10,800. The collection shrinks with the business, which is the entire point of the structure.

Under a fixed debit sized on the average — $10,800 across 21 business days is $514.29 a day — January still collects $10,800. Against $48,000 of volume that is 22.5% of everything you took, not 12%.

The gap in that single month is $5,040, and it lands in the month you can least afford it — which is why an estimate built on your average deposits is the wrong number to plan against. Size the advance against the worst month in your last two years, and check that the answer is survivable before you look at the factor.

How the money actually gets taken

Three mechanisms, and they behave very differently when something changes.

Ask which one applies, then ask the follow-up: if I change processors or banks during the term, what am I required to do first, how long does the changeover take, and who bears the cost.

What a second position does to the arithmetic

A 12% holdback is survivable. Two of them are not the same thing as one at 24%, and they are worse.

They collect on different schedules from the same account, with no coordination between the two funders and nobody holding an interest in your survival. And if your first agreement prohibits additional financing repaid from the same receipts — most do — the second advance breaches the first on the day it funds, which puts your guarantee in play immediately rather than eventually.

Before taking a second position, work out the combined collection as a share of your worst month's deposits. If that share exceeds what your business has left after cost of goods and payroll, the arithmetic has already answered the question.

What to check before signing

• The holdback percentage and the base it applies to — card settlements only, or all bank deposits.
• Whether collection is by split funding at the processor, a lockbox, or ACH from your operating account.
• What happens if you change processors mid-term.
• The reconciliation right, in writing, including the documentation required and the turnaround time.

The dollar total is the only figure in this product that stays still. Work out what the holdback takes in your worst month, not your average one — see the daily debit as a share of your daily deposits — and run the term sensitivity through the calculators.

What a reconciliation request actually has to contain

Where the right exists, it is usually conditioned, and the conditions are where it fails. Find four things in the clause and write the answers down before you need them.

Then ask the funder for a worked example before you sign: here is a month in which my deposits fell by 40%, show me what I send, what you send back, and how long it takes.