Merchant funding in the form of advance cash is a financial service which currently seeks to provide capital for mainly small and medium scale businesses. This service as it were is especially suited to companies which accept credit card payments and which fulfill a huge volume of their face to face business transactions by doing so. Funds provided to the merchants, that is business owners, are given in exchange for the future card receivables of the businesses. This should prove quite easy since the majority of the business sales occur through credit cards.
It is quite significant that the growth of merchant cash marketplace which has been characterized by the upsurge in the number of marketers over the last couple decades has provided merchants with an alternative source of obtaining business funding. More so, independent sales organizations have enjoyed much revenue inflow as a result of this growth and this could be the game changer when it comes to the issue of offsetting the price pressures in the card processing business.
The advance cash obtained from merchant cash vendors bears so much similarity with the funds from other traditional sources in that the payments are remitted to the lenders automatically through the same card processing system. That is, there is, by default, an obligation on the credit card company of the merchant along with its agents to remit the funds directly to the cash advance provider. Unlike business funds from traditional sources such as loans from commercial banks, a merchant cash advance is not a loan speaking from a technical perspective.
There are quite a number of reasons for this, some of which shall be discussed later. But for now, it is helpful that a merchant loan is viewed primarily as a business transaction. In fact, it is more appropriate to consider it as a business to business transaction as transactions involving merchant loans are not governed by federal and state laws that apply to business to customer transactions. However, such laws as the uniform commercial code, fair reporting act do apply and impose obligations on the merchant providers.
Who is “qualified” to receive funding merchant advance vendors?
In order to clear the air on some of the several misconceptions, there are concerning funding a business through advance cash, it is necessary that it is made crystal clear that merchant loans are best suited for small and medium-sized firms which makes credit card sales on a consistent basis. Some firms which might readily meet this criterion are such firms as restaurants, gas stations, and the likes. In addition, firms which operate on a seasonal basis might not exactly find merchant loans the best option.
The reason for this is that merchant cash providers require repayment at fixed intervals, sometimes daily or weekly. If a seasonal firm seeks advance cash then it must lay down solid plans on how it is meet up with the payment schedule—or, at least, understand that having a portion of its revenue deducted during the off-season period could place a significant strain on the cash flow of the business. It can also help if a business has other sales method which is in good proportion to those obtained through credit cards.
So, apart from businesses which do not make consistent credit sales or those businesses which are seasonal in nature, virtually every other small and medium-sized business is qualified for a merchant cash advance. But whether the advance cash is required to obtain some new machinery, to pursue business expansion, or even to offset some debt, lending firms are eager to provide the needed funds. One other thing which makes an advance similar in structure to a loan is that if a business finds itself in a pressing situation it can easily request for an additional advance even if the previous one has not fully repaid.
How many funds Can a Business Get through a Cash Advance?
Of course, it cannot be expected that the quick advance cash from lending companies will be of the same magnitude as those from commercial banks which have more financial strength. In this regard, firms will typically loan as much as much as $250000 give or take few ten thousand dollars. The determining factor of how much a business gets in the way of advance is its volume of credit card sales. In most cases, merchant advance cash providers will only fund as much as four times the monthly credit sales of the business. The nature of the business in terms of whether or not it is a seasonal also plays a pivotal role in the decision making the process of the lending firms.
What is the timeframe for the loans to be paid back?
In order to appreciate why it is that merchant firms require a short period for an advance to be recouped it is useful to understand that at present the industry is unregulated and there is also many risks involved on the part of the lenders. So, recouping the advance becomes the top priority of the merchant cash providers. Depending on the amount that is borrowed, the cash inflow of the business, and the payment option adopted, it could take from 6 months to 12 months to repay the doubt, although most lenders will expect to have fully recouped their funds by the end of the eighth month.
How exactly does merchant cash advance work?
To further understand how the payment duration is determined an understanding of the basics of merchant advance is in order even though complex legal issues relating to an advance cash shall not be discussed. The first thing to know is that merchant cash providers make a profit by multiplying the loan amount given to businesses by a certain factor that is usually between 1.2 to 1.5. It is the result of this multiplication that gives the total amount payable by the business. It also easily seen that it is the difference between the advance cash and the total payable amount that provides profit for the firm.
To recoup the advance plus profit the lending firm decides to take a certain percentage at fixed intervals. This percentage is usually in the range of 15 to 25% depending on the seasonality of the business, its volume of credit sales per month, and other peculiarities. It is the chosen percentage that the actual amount is computed; this amount that is paid at the predetermined interval is known as the retrievable amount. But there are always concerns as to whether there’s flexibility as regards the mode of payment. Of course, there are two main methods one of which a business can easily adapt to offset the advance.
Methods a business can adapt to repay a cash advance
The first method that comes to mind when speaking of flexible payment plans is the fixed percentage method. In this mode of payment, a fixed percentage of the credit and debit card sales of the business are used to offset the debt. It takes the involvement if the credit card company of the business to make this happen. There is an obvious advantage, so to speak, that comes with this method. This stems from it being that it affords the duration of payment to be flexible.
For instance, if the advance cash provider envisaged that it would nine months for the fund to be recovered based on an estimate of monthly revenue of $50000, and it turns out the actual difference from this amount, the payment period automatically changes when this method is adopted. The degree to which the duration is extended or reduced depends on how much the actual sales differ from the estimate upon which the earlier assumption was made.
The other amount, in contrast, requires a fixed amount to be paid on a daily or weekly basis regardless of whether or not sales are poor—and even when no credit sales are made. As a result, this method does not afford the business a flexible duration of payment. It is even supposed that this method could put quite a strain on a business if not completely compromise its chances of survival. Although there is some truth to this, it can be said that such situations are not so common.
Benefits that come from using merchant cash funding
Of all the reasons that attract business owners to obtaining advance cash from merchant loan vendors, speed and ease stand out as the foremost on the list. For everyone in business knows how hectic it is to obtain funds from commercial banks, Apart from bureaucratic delays, it is quite difficult, frankly speaking for startups and business which have yet to build a solid relationship with obtaining funding from it—especially in emergency situations. This where a merchant cash advance comes in since it is well known that it takes about ten business days for a request to fully processed and granted if approved.
And the approval rate for merchant loans is high when compared to those of commercial banks and other traditional sources. One reason why it is so is that a good credit score is not considered in the decision-making process of the lending firms. In addition to not having to have a good score, merchant cash firms also do not insist on collateral before cash advance is obtained. It is some of these reasons that have made merchant cash advance quite popular amongst business folks.
But then, there are some business persons and financial experts who would object to getting advance cash for reasons of cost. Of course, nobody is denying that merchant loans are relatively more expensive than loans from commercial banks. But, it has to be seen that the ups of merchant loans more than compensate for the lows and as such remains the preferred option for business who are in dire need of financial assistance.