The Future of the Merchant Advance Industry

merchant advance

Just a few years ago there were a little above hundred merchant advance alternative lenders in the country.  However, the immense success which the pioneer merchant cash advance investors experienced encouraged others to delve into the alternative financing industry proper. As of now, there are way more than one thousand merchant vendors spread across different towns and cities in the United States. All of these merchant loan providers alongside their counterparts in alternative finance al seek to eliminate some of the problems inherent in the traditional financing industry. Merchant vendors have, however, come to be the most popular group of alternative lenders probably because they have proven time and again that they are more equipped to meet the financial needs of small business owners better than others.

The success of merchant advance providers has even caused commercial banks to begin to re-evaluate their lending requirements with a view to making them as competitive as those of merchant cash advance providers. To this end, some commercial banks have begun working on developing their own online lending services, possibly trying to mimic the merchant cash advance model. In some cases, banks have worked towards collaborating with some of the industry leaders in the sector as investors or partners. Whatever the case is, it has to be said that the introduction of alternative lending has totally changed small business lending as the world once knew it. In any case, it is important to identify some of the factors that have been responsible for the rise in merchant advance in recent years before even taking a look at how the whole process works.

Read More: The Best Short-Term Small Business Loan Options

Why has Merchant Cash advance come to be so popular?

One of the main reasons why merchant cash advance has become so popular has to with the fact that it provides ready access to business loans. In a business setting, there is hardly anything that is important as the fact that when a business is in urgent need of funds in order to solve problems—either in through form of equipment purchase, meeting up with payroll, construction—it gets it quickly without going through a very rigorous process. This is exactly what merchant advance does by making business funds available to businesses in a matter of few days.

With merchant cash advance small business owners know that they do not have to go through the rigorous process of waiting several weeks or months for bank loans. Since the approval rate of bank loans is very low-somewhere around 30 percent—it is even very likely that after several weeks of waiting that the bank would still decline the loan request. Nothing could be better than applying for a loan and knowing that it is nearly as good as delivered when a business is in difficult times.

Absence of collateral and personal guarantee

One other reason why merchant advance companies have become the favorites of small business owners is that they offer loans without demanding for collateral as is typical of commercial banks and other traditional lending institutions. In addition to not demanding collateral, merchant cash advance providers also do not insist on personal collateral which would have made the business owners personally responsible for paying back the loans. The main reason why merchant vendors do not require collateral is that a merchant advance transaction is not structured as a loan. For a transaction to be referred to as a loan it must be that a certain amount of money has been offered to a business in which case the business agrees to pay back the said amount along with interest after some specific time. Failure to pay back the loan at the specified time could result in serious penalties, loss of collateral or even foreclosure of the business.

However, a merchant advance is simply a transaction where a business agrees to sell its future credit card sales to a merchant cash advance provider in return for a lump sum of cash. Unlike a loan, the merchant does not promise to repay the loan unconditionally. The repayment of the loan is essentially tied to the credit sales of the business. In so far as the business remains in existence and is making sales, the merchant is entitled a fixed percentage of the daily sales geared towards the repayment of the loan. If, on the other hand, the business fails, the merchant is not bound to repay the loan through, for example, the sale of personal assets. Be that as it may, a business owner cannot choose to embark on activities that could deny the merchant advance provider if his pay. In practice, the merchant agrees to ensure that all is done in order for the cash advance provider to recoup his investment.

Read More: The Case for Cash Advance Companies

Insistence on lower credit score

One last reason why small businesses are embracing merchant advance is that they have made it possible for business with poor credit to obtain loans. The fact that merchant vendors require minimum credit scores far less than those of commercial banks have opened the door for several businesses that would otherwise not have obtained loans. While banks continue to insist on a minimum score of around 650, merchant cash advance providers peg theirs at around 500. The main reason why merchant advance providers do not pay much attention to the credit score is that the advance is based on sales volume and nothing else. However, one chooses to see it, one has to acknowledge that most businesses with poor credit scores would automatically find merchant cash advance very attractive.

Conclusion

Just like every other business sector, the merchant cash advance industry has been evolving gradually. At a point, only businesses that accepted credit and debit card payments were eligible for a merchant advance. In recent times, businesses that utilize ACH have become eligible for advances as well. This alone has opened a whole new chapter in the history of merchant cash advance since several thousands of small business owners that did not qualify for MCA are now turning to merchant vendors. The industry will, of course, continue to grow and expand. As such it is quite safe to expect that more small businesses will embrace merchant cash advance as time goes by.

 

One thought on “The Future of the Merchant Advance Industry

  1. Ian says:

    “We have been working with JC since its inception. The team is focussed, efficient and commercial. They are a pleasure to work with.”

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