Is Merchant funding the Perfect Answer to the Issue of Small business Finance

merchant funding

In recent times there has been a significant reduction in the number of loans issued to small businesses in the United States. Following the economic downturn of 2008, lending institutions have become particularly wary of lending to small businesses. It has been observed that the total commercial bank lending to the small business sector has decreased by as much as 20 percent. This is something that is quite alarming since the small business sector accounts for more than 50 percent of the total employment in the country. Because of this decline in commercial bank lending to small businesses, owners have been forced to resort to Merchant funding which happens to be one of the leading sources of alternative funding in the country.

The introduction of alternative sources of funding is expected to tackle most if not all of the problems inherent in the traditional lending sector. And as commercial bank lending continues to slide down on a continual basis, lending from alternative sources continue to rise. For example, it was found that in one single year alone in the last decade the total lending to the small businesses sector from alternative sources of which Merchant funding forms a major part was in the neighborhood of 4 billion dollars. This shows that the alternative financing is gaining popularity among business folks and that soon, there is a possibility that the so-called alternative sources will become the leading sources of funding for small businesses.

Read More: Merchant Cash Advance and the Question of Small Business Financing

Obstacles to obtaining business funding from traditional financing institutions and how merchant cash advance helps eliminate them

Collateral

From the earliest of times, it was the commercial banks that were the major source of business funding for both small and large-scale businesses. Part of the reason for this is that governmental authorities ensured that lending to certain key sectors such as commercial banks was to be carried out only by commercial banks. In spite of the early progress banks made in the area of providing loans, the current situation is a far cry from what is used to be, hence the need for Merchant funding. One of the major obstacles to obtaining commercial bank loans is that of collateral and in some cases personal guarantees. Banks take the issue of collateral as a top priority because it gives them security against the loan issued to the businesses whose ability to pay cannot always be known for certain. Collateral that could be required in most of the cases is business assets in the form of real estate.

In addition to collateral, banks have been known to sometimes insist on personal guarantees from the owners of the small business before loans can be issued. What happens is that net worth of the guarantors is evaluated and it is determined or not their net worth equals or exceeds the value of the proposed. Personal assets that could be offered in cases like this include homes, cars and so on. No doubt, Merchant funding being a source of alternative finance eliminates the need for collateral because it is has hindered lots and lots of small businesses from having access to business finance. In a typical merchant cash advance transaction, there is neither collateral nor personal guarantee to be offered by the borrowing business. This is one of the things that has helped merchant cash advance become popular. One might often wonder if there is anything that could be more exciting than knowing that one could borrow money without having to suffer any repercussions if one is unable to pay back.

Credit score

One other major problem with commercial bank lending is that good credit scores are required before a business can be considered for a loan. The logic of this is quite simple. The credit score of a business shows how well or not the business performed in the past when it borrowed money. This has to establish the creditworthiness of the business owners. However, Merchant funding makes it easier for business finance to be more accessible to small business owners since it is not required for the business to have a good score before it can be issued a cash advance. This does not in any case that firms with very terrible scores could automatically be eligible for a cash advance. The reality is that the minimum score requirements of merchant cash advance providers are generally always lower than those of commercial banks. The minimum score requirement for a particular loan request would depend on the merchant cash provider as there is no uniformity as such in the sector.

Read More: 7 Things About Funding Sources that Small Business Owners Don’t Know – But Should

Time taken to obtain finance

One of the major features of Merchant funding which has endeared it to the increasing number of business owners is speed. The speed at which a loan can be granted is essential in certain situations. It is not unusual for a business to be in urgent need of cash. One good example of when a business could be in such a dire need is when it is eager to take advantage of a new opening in the market, or when there is a certain upsurge in product demand, and there is no finance to perhaps purchase new equipment or upgrade existing ones. In situations like these, the most important consideration for a business seeking external business funding would be speed. And when it comes down to speed Merchant funding does not disappoint as it is very much possible for a cash advance to be delivered to a business in 48 hours. In the worst case, scenario cash might be available to a business within 2 weeks. But for commercial banks, loans, depending on their nature, could take several weeks or months before they are fully processed. Construction loans, In particular, could take up to for the approval and closure to take place.

Documentation

Anyone who has applied for a commercial bank loan might be in a very good position to understand how hectic the process can be as a result of the rigorous documentation required. Form financial statements for several months to business plan the list is virtually endless. It is even the plenty of documentation that is required to generate the delay in the processing of bank loans since the documents would have to be evaluated. For Merchant funding, however, there is minimal documentation. In most cases very minor documents such as driver’s license of the business owners, social security number, and business sales record for the previous few months that might be required. This is all that combines to make the whole process of obtaining Merchant funding as easy as it can be.

What exactly is involved in the process of obtaining Merchant funding?

Merchant funding first and foremost is only provided to businesses which have met some general criteria. The first criterion a business has to meet is that of the volume of credit sales it takes in a month. Most merchant cash advance providers require that a business generates a minimum of 5000 dollars in monthly revenue. This is quite important since it is from the daily credit sales of the business that payment for the advance will be made. In addition, the above a business seeking merchant cash advance must be on that already accepts credit card payments whether it is visa or MasterCard. The business must also meet the minimum score requirement of the particular merchant cash advance provider. Once all the requirements have been met the stage becomes set for the signing of the Merchant funding contract and for to be released to the business.

The merchant cash advance agreement is a legally binding which stipulates of the loan so to say. Terms included in the agreement would normally include the withholding percentage, the factor rate as well as the total payback amount. The withholding percentage is the fraction of the daily credit sales of the merchant that is remitted to the merchant cash vendor. It could be as small as 5 percent or as big as 20 percent. In order to determine what the withholding percentage should be for a particular business a number of factors are considered.

The amount volume of monthly revenue, business expenditure, as well as the nature of the business, all play a major role in determining the withholding amount.  On the other hand, the factor rate is used to multiply the actual amount obtained through the Merchant funding in order to arrive at the total payback amount. This is done in order for the merchant cash advance providers to earn some profit for the risk they take. As soon as all of the terms of the advance have been agreed to by both parties the agreement is signed and cash is issued to the business when an arrangement for the daily remittance of funds to the providers has been made. Once the cash is received, the merchant begins to make daily payments from sales until the advance has been fully repaid.

Conclusion

It is quite obvious how much Merchant funding has gone a long way in shaping business lending. There are a handful of benefits that come with merchant financing. In spite of its relatively higher cost business owners are gradually embracing it as a veritable source of business finance.

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