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Gross margin
Also called gross profit margin, GP%.
Revenue left after the direct cost of delivering the product or service, expressed as a percentage — the first number that tells an underwriter whether a business can survive a daily remittance.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Revenue minus cost of goods sold, divided by revenue. Cost of goods sold means the costs that move with volume: materials, direct labour, freight in, merchant processing on the sale. Rent, insurance, the owner's salary and the office manager sit below the line.
The number matters in funding because it determines how much of each dollar of revenue is actually available to pay anything. A business at high gross margin has room; a business running thin margins on pass-through volume does not, no matter how large the top line looks.
Why this matters more than revenue in short-term funding
Merchant cash advances and daily-debit products are sized off deposits. Deposits are a revenue measure. A staffing firm, a fuel distributor, a food wholesaler, an electrical contractor buying material for a job — all of these can show very large deposits against very small margins, because most of the money in the account belongs to somebody else. A holdback percentage that a restaurant absorbs comfortably can be fatal to a distributor with the same deposits.
Sector shape
Service businesses without material costs typically run high. Distribution, resale and construction with material pass-through run low. Comparing gross margin across industries tells you nothing; comparing it to the same business last year tells you a great deal.
Where this one catches people
Gross margin is not the money available for debt. Everything below the gross-profit line — rent, payroll, insurance, utilities, existing debt service — comes out of it first. A funder quoting a holdback against deposits is claiming a slice of revenue, but the merchant pays it out of what is left after gross margin has already been reduced by every fixed cost. That is why the same holdback strains two businesses differently.
Worked through
Illustrative. A distributor bills $500,000 in a month. Cost of goods sold is $425,000. Gross profit is $75,000, a 15% gross margin. Fixed operating costs are $55,000, leaving $20,000 before any debt service.
A holdback taken at 10% of deposits would remit $50,000 that month — more than twice the cash the business actually generated. The deposits comfortably support the number; the margin does not.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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Gross margin — common questions
What does gross margin mean?
Revenue left after the direct cost of delivering the product or service, expressed as a percentage — the first number that tells an underwriter whether a business can survive a daily remittance.
Where does gross margin catch people out?
Gross margin is not the money available for debt. Everything below the gross-profit line — rent, payroll, insurance, utilities, existing debt service — comes out of it first. A funder quoting a holdback against deposits is claiming a slice of revenue, but the merchant pays it out of what is left after gross margin has already been reduced by every fixed cost. That is why the same holdback strains two businesses differently.
Is gross margin the same as an interest rate?
Gross margin is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does gross margin apply to?
Merchant Cash Advance, Working Capital, Invoice Financing, Revenue-Based Financing.
Is there a worked example of gross margin?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside gross margin?
Cost of Goods Sold, Debt service coverage ratio, Gross monthly deposits, Gross receipts, Holdback percentage.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.