There are several options open that a business can choose to explore when in search of business funding. At present, the options available extend beyond the conventional lending institutions such as commercial banks to include alternative lenders such as merchant cash providers. Because of this multiplicity of choice, businesses now have a hard time deciding on which of the lending options is best suited for them. Of course, when it comes to the issue of business lending, the age-long saying, different strokes for different strokes, might apply.
While conventional lenders such as commercial banks have shifted focus from small businesses to big ones, alternative lenders, on the other hand, are primarily concerned with small businesses. And with overall bank lending to small business declining by less than 20 percent in the last 10 years, it is expected that the vast majority of small business will have no choice than to look in the direction of alternative lenders, especially merchant cash providers who are by far the most popular group.
Part of the reason why merchant lenders have grown in popularity in their relatively few years of existence is that they have removed some of the obstacles inherent in the traditional loan process. Meanwhile, loans that are obtained from merchant lenders can serve a variety of purposes, ranging from equipment financing to inventory our chase. Merchant vendors provide construction financing, and could even provide funds for consolidation of previous debts owed by the business.
Understanding Merchant Cash Advance
Merchant cash advance providers generally seek to provide capital that might not be available through the traditional means by buying the future receivables of a business and providing cash advance in return. The process of obtaining a merchant advance is basically structured as a sale, which is what is. In a merchant advance transaction, a business sells its future credit card sales to the merchant advance provider at a discounted price, considering that the amount that is borrowed will certainly be worth more in the future when it is to be repaid.
Obviously, providers do not demand interest payments in the same that commercial banks do. Because of the fact that the sale is discounted, the business agrees to pay a little more than it borrows. In practice, the merchant vendor factors the loan amount by, say, 1.2, meaning that the business gets to pay 120 percent of what it borrowed. But in contrast to what obtains with commercial bank loans the total amount that the business pays is not split into the number of months for which the loan is granted, ensuring a fixed monthly payment; rather, a fixed percentage of the daily credit card sales of the business, goes into the repayment of the loan.
Because this process is automatic as it is facilitated by the credit card processor of the business, issues such as late payments do not arise. One obvious advantage of merchant cash, therefore, is that the business is made to pay according to how it earns. In earnest, the business gets to pay more when sales are booming and less when sales decline, ensuring that cash flow is not strained significantly.
Requirements for Receiving a Merchant Cash Advance
The foremost requirement for obtaining merchant cash is the business generates a large volume of credit card sales on a monthly basis. This is because everything about merchant lending is tied to the credit sales volume of the business. Businesses do not provide any collateral nor do they offer personal guarantees; as such merchant lenders rely completely on credit sales in order to recoup their investments. It is even based on the volume of credit sales that the amount to be issued to the merchant is decided.
The factor rate and retrieval amount all have something to do with the volume of sales a business generates. Other requirements include a minimum credit score of 500, which the threshold of commercial banks which is often 650.
For a business to be eligible for merchant cash funding, it has to have a physical location as online businesses are generally excluded from receiving an advance. From all indications, businesses such as restaurants, large supermarkets, gas stations, and most other businesses generating huge credit card sales, are the perfect candidates for merchant cash advance. Businesses that are of a seasonal nature can also profit from merchant cash advance. Ahead of the season, such businesses could obtain merchant loans in order to purchase inventory, and as soon as sales begin, daily deductions are made from the business to pay off the loan.
Benefits of Merchant Cash Advance
Merchant advance providers offer what is likely the most flexible, and fastest business financing. A core objective of alternative financing has been to eliminate the delay associated with loans from traditional financial institutions. Businesses have often experienced delays of several weeks to several months when applying for bank loans. It is claimed that the banks spend such periods evaluating the loan applications. And even after such long periods of waiting, it sometimes happens that the loan application is turned down. The chances of a loan request being turned down—when small businesses are involved—is somewhere around 60 percent.
Merchant cash providers, in contrast, make loans available to businesses in just a few days depending on the amount that is involved. Because most small businesses that are in dire need of cash would often want funds available in the shortest possible time, they have had to resort merchant cash advance as it is virtually the only funding option that can make cash readily available. Above all, all of the complex legal issues are likely to be part of typical bank loan transactions are totally avoided with merchant cash funding. This in itself could help to save some procurement costs for the business. In spite of the significant benefits of merchant cash advance, some have objected to it because of its cost. Granted, merchant funding is relatively more expensive than, say, commercial bank loans. If, however, merchant cash advance is considered holistically, one often finds that the value obtained from merchant funding more than equals the cost.