Small and medium scale businesses remain the major driving force the United States economy and indeed, the world economy. Because of this, it is seriously important that small businesses have easy access to business funding. Whenever it comes to the issue of funding, business owners have been known to lean towards commercial banks and other traditional sources of funding. And although traditional financial institutions have begun loosening their credit loan requirements in such a manner that small business ought to benefit, there is still the need for small and medium business owners to look to alternative sources of funding. Small businesses, such as restaurants might find it difficult to obtain restaurant financing from commercial banks for a number of reasons.
Why are an increasing number of small business owners looking to other sources of funding?
According to a report by the federal reserve bank of New York, it was revealed that as much as 57% of small businesses were denied access to loans by commercial banks, while some small business owners did not even bother to seek loans from banks in the first place. The implication of this is that this same percentage of small business owners are willing to explore other options in order to obtain the much-needed capital to ensure their continued survival. One of the major reasons why small firms are denied loans according to the same report is insufficient collateral—and this accounted for more than 40% of the total rejections. Poor Business credit score and poor business performance in terms of weak cash flow were also major factors that influenced the banks` decision not to grant loans to small businesses. So whether it is restaurant financing or some other form of business funding, a business owner is going to have to look to alternative sources of funding which do not base their decisions on much those factors that we have mentioned.
Merchant Cash Advance: One of the best sources of Alternative finance
One of the leading sources of alternative funding in the United States is merchant cash advance also known as MCA. Merchant cash advance is widely considered to have revolutionized the way in which businesses obtain funds—especially in terms of ease and speed. It has even been estimated that there are currently more than 1000 merchant providers in the country, all ready to provide such services as restaurant financing, and this underscores the point that the industry is booming. Merchant cash advance companies are in business to provide working capital and equipment financing for small businesses that process a large number of credit sales such as restaurants in exchange for their future receivables.
Obtaining restaurant financing through merchant cash advance begins with the restaurant owner signing an agreement known as merchant cash advance agreement. This agreement empowers the merchant cash advance provider to recoup the cash advance from the future credit sales of the business. This kind of transaction is quite different from a loan, at least from a technical point of view, even though both an advance and a loan serve the same function of providing capital to the same which is expected to be repaid at some time in the future. To make this point clear let us look at an explanation provided by the United States court of appeal for the second circuit: A sale is the transfer of property in a thing for the price in money, while a loan of money is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows.
In what ways does a merchant cash advance differ from a commercial bank loan?
It is very clear from the above definition that restaurant financing from merchant cash advance is structured as a sale; that is, it is simply a commercial transaction which involves two businesses. To further differentiate cash from a loan one can point to the fact there is no actual guarantee of payment in a merchant cash advance transaction as obtains in a bank loan. This means that the merchant provider can only hope to recoup the advance from the future credit sale of the merchant as long as the business is in operation, and is liable to suffer total loss if the business happens to fail. However, the merchant has a duty to not engage in fraudulent activities or other acts of deception that will deny the merchant cash advance provider its purchased receivables. And although the merchant generally guarantees that the business will keep to the terms of the merchant agreement, he offers no personal guarantee for the repayment of the loan, meaning that he cannot forfeit personal assets if he fails to pay.
Because a merchant cash advance is essentially a commercial transaction, it is not subject to such laws as the commercial usury and licensing laws which oversee loan transactions between banks and customers. Although the industry is presently no regulated, merchant cash advance transactions are still subject to the uniform commercial code of each state as well as the fair credit reporting act. In general, the terms of a commercial loan are fixed but those of a merchant loan for restaurant financing are not fixed. For instance, while a bank loan is expected to be repaid by the borrower at a fixed time, the time for the repayment of a cash advance is not fixed. Meanwhile, there are no penalties for late payment of an advance in contrast to what obtains in a loan, nor are there rewards for quick payments. One thing also needs to be said: merchant loans do not attract interest in the traditional sense of the word. If that is the case, one begins to wonder how merchant providers manage to make profit.
How merchant cash advance works
In order for restaurant financing to be obtained from a merchant provider the restaurant signs an agreement empowering the provider to receive a fixed portion of its credit sales until the advance is paid. The actual amount to be paid by the restaurant is obtained after the advance is multiplied by a certain factor which is typically less than 1.5. It is this difference between the actual cash advance and the total payable amount that yields a profit for the merchant provider.
Flexible Modes of payment
There are two ways in which the cash advance can be deducted from the business. The first requires that a fixed percentage of the credit sales—usually less than 25%–is transferred to the merchant provider until payment for the restaurant financing has been completed. The other method requires that a daily, fixed deduction is made until the cash advance is repaid. Either of the two methods has its ups and downs. In the fixed percentage method, for example, the actual amount paid is dependent on the prevailing business situation. In times when sales are high more is paid, and when sales are low, lesser is paid. This method is thought to be more beneficial to the business as it does not impose much strain on cash flow, and it is the method most adopted by merchants. This, however, means that the time in which the restaurant financing will be repaid is not exact. But, in the method of fixed payment, the debt is paid much faster since a fixed amount is paid regardless of whether or not sales are going up or down. Some consider this method to impose a significant strain on cash flow when sales are low.
Benefits of Merchant Cash Advance
The foremost reason why small business owners often seek funding through merchant cash advance is that of the speed with which funds can be obtained. A restaurant that needs restaurant financing to maybe buy new cookers will always benefit if the advance is obtained much quicker, rather than having to wait months for bank loans. While commercial bank loans will often take weeks or even months to process, it takes just a few business days for a merchant cash advance to be obtained. In addition, the approval rate for a merchant cash advance is much higher than that of a commercial bank loan and even loans for other alternative sources.
Minimal documentation is also another factor that has endeared small business owners such as restaurants to merchant cash advance. Only such details as the number of credit sales per month are required in order to determine if the business meets the minimum revenue of $5000 per month.Furthermore, a good credit score is not required in order for a business to obtain merchant cash advance. But by turning to merchant cash advance providers for restaurant financing, restaurants are able to obtain the much-needed working capital.
Finally, nothing is probably as attractive about merchant cash advance as the fact that it is an unsecured loan. This is not surprising considering that most businesses are unable to meet up the collateral requirements of banks. And better still, no personal guarantee of any other kind is required and the business owners do not risk losing personal assets. All in all, it is obvious that merchant cash advance has come to stay, and small business owners are gradually embracing the funding opportunities it provides.