It has been found that around 30 percent of loan applications are rejected for poor credit. This is not at all surprising since most traditional lenders still require a business to have an excellent credit score before it can be issued with business funding. To most of these lenders, particularly commercial banks, an excellent credit score means a score of at least 650. It is reasonable why commercial banks would insist on such high scores. For one thing, lending to small businesses is something that is considered to be risky. In spite of the fact that small businesses are asked to provide collateral and even personal guarantees, banks still feel that a business that has a good credit history is more deserving of a loan than one that is not. After all, the credit score of a business is, in any case, a measure of how faithful the business has been in time past in terms of meeting up with the payment schedule for previous loans. However, alternative lenders such as merchant cash advance providers seem to see things differently.
Merchant lenders, in particular, have offered what is often regarded as bad credit loans to small businesses for a couple of years. Such loans do not require a business to have a good credit score. It does not, however, mean that just about any score would do. In reality, merchant cash advance providers require a minimum score of around 500 before a cash advance be obtained. There are still some new entrants that can offer bad credit loans to firms having credit scores that are below 500; the idea, therefore, is for one to find the particular merchant vendor that has suitable requirements.
Requirements for Obtaining Merchant Cash Advance
In order for a business to be eligible for a merchant loan, there are certain requirements which it has to meet. Because the entire merchant cash industry is unregulated, one cannot expect that there the requirements would be uniform. Each merchant cash advance provider is unique and could have requirements different from those of others. In any case, there are some general requirements that are common to all merchant vendors.
The foremost requirement for bad credit loans is that the business must accept credit card payments. Since the cash advance is to be repaid through credit sales, it is necessary for the business to have credit card payments so that sales can be effectively monitored, and so that the portion of the sales that is due to merchant cash advance provider can be remitted automatically with the assistance of the credit card processor of the business. In some cases, it is even the credit card processor that offers the cash advance to the business, something a good number of business owners seeking bad credit loans actually favor.
The second requirement is for the business to process a large volume of credit card sales each month. This is a core requirement since a business is only allowed to borrow somewhere around 150 percent to 400 percent of its monthly sales. The minimum monthly sales revenue a business is expected to record is usually $5000, although some new merchant cash advance providers could place it below that. In order to decide whether or not a business has met this criterion for bad credit loans, the merchant vendors often request the sales records of the business for about 6 months prior to the time of application. Once the merchant lender is satisfied with the revenue, it then proceeds to determine the maximum amount of cash the merchant is entitled to. It has to be said that most small businesses are often able to meet this particular requirement and this is one of the reasons more and more small business owners are embracing merchant cash advance.
Other minor requirements are still to be met by a business before it can receive a merchant cash advance. For example, it is required for the business to have been in operation for a period of at least 6 months, or 3 months as the case may be. Businesses seeking bad credit loans from merchant vendors also need to have a physical location since online businesses are generally excluded.
How the Whole Process Works
The process of obtaining a merchant cash advance is nothing like that of applying for a commercial bank loan because it is very straightforward, requires minimal documentation, and can be completed very quickly in less than one week, and sometimes even in one day. Once the business fills an application for a cash advance, merchant cash advance providers typically respond by sending an agent to evaluate the business with a view to determining the maximum amount the business can receive the factor rate as well as the retrieval rate for the loan. Unlike commercial banks, merchant vendors tailor bad credit loans to meet the needs of the individual business. To determine the factor rate—an amount less than 1.5 that is used to multiply the actual cash issued to the business to give the total amount it is to pay back—merchant vendors consider the amount that is involved, the strength of the business, and other peculiar factors. On the other hand, the retrieval rate is chosen in such a way that cash flow will not be strained. The merchant cash advance provider typically looks at the monthly expense of the business to determine a suitable rate. Bad credit loans are then issued to businesses after the merchant cash advance agreement has been signed.
Why a Business should seriously consider a Merchant Loan
Any business that is denied access to commercial bank loan based on credit score would normally find that bad credit loans are the next option. Of course, once other requirements have been met, the business should receive the loan. There are, however, other benefits that follow from merchant cash advance. One of those is that a business is not required to provide collateral or guarantee before obtaining funding, and stands to lose nothing if for some reason it is unable to repay the advance. For bad credit loans, the approval rate is more than 90 percent, ensuring that almost every business that applies gets the loan. All in all, a business gets to save time and even resources by opting for merchant cash advance. It is, therefore not surprising that more and more business owners are finding the idea of merchant loans very attractive.