Merchant cash advance loans have become very popular over the last few years. These merchant cash advances are known to be easy, accessible and a fast way to provide finance for a small business, especially if banks or other financial institutions would not lend money to them for various reasons.
Although a form of a short-term financing for the small business, merchant cash advance loan is not typical credit. It was initially designed to be a prepayment financial solution where the lender provides a certain amount of money against the obligation of paying a portion of future credit and debit cards sales of the small business. Because of the convenience offered – operable money instantly against deductible portion of every sale on daily basis, the merchant cash advance has quickly evolved into a less complicated tool to fund your small business.
Traditional loans usually provide financing with a longer term of repayment and they require more paperwork. The company should also have a solid background, be in good standing and secure the loan with proper collateral. After all documents are gathered and provided, approval of banks may take a while. Small businesses are often unable to meet such standards. Merchant cash advance, on the other hand, is an efficient way to obtain the required funds only against the obligation to pay a small portion of your everyday sales (8% to 13-15 %, depending on the provider) for a shorter period (typically up to 24 months). The repayment is arranged through the processor of the credit or debit cards payments. Because it is done daily, there is no need to have a stable cash reserve on maturity date or worry about pay dates and penalties. The remittances of the small business are collected directly by that processor day by day until the merchant cash advance is fully paid up. The repayment starts almost immediately. There is faster access to the much needed capital and there isn’t the pressure of having to make regular installments make the merchant cash advances the preferred choice for small business financing.
The very structure of the merchant cash advances significantly differs from traditional loans and therefore the merchant cash advances are not considered as such. They depend on future sales and for that reason, the business should have steady credit and debit card sales. The sales volumes are analyzed by the potential provider of the merchant cash advance and the assessment would determine how much a business could get in the cash advance. It may be between 80% and 150% depending on past sales flow and the policy of the merchant cash advance provider. Personal credit score would not be considered. If your small business has reliable sales history and a predictable volume of credit cards sales for a certain period, you should have no problem of receiving upfront funding.
Besides, easy accessibility is another advantage of merchant cash advances. The merchant is given greater freedom in operation of his income regardless of whether sales is slow or good.
There are two usual ways of repayment. The first one is the most popular and favored. The deduction is done by the processor of card payments and the income is immediately split between the merchant and the advance cash provider. The second option requires for all profit from credit cards sales to go into a special account and the split is done after that (not very popular due to time required for both sides to receive their portion). In the second option, the account is debited on daily basis again – it just takes longer to process.
Being as easy as it sounds, this type of financing is relatively more expensive than a bank loan. The granted amounts are to be repaid in 9-10 %, up to 50%. Of course, due to the daily deductions, business would not feel the burden of repayment so heavily if sales run well.
But merchant cash advances have both advantages and disadvantages. If your company suffers from slow payers, this could end up being a problem. High profit margins would allow you to benefit from the repayment methods and keep and earning, while the other way around may temporarily freeze your profit as it is deducted to cover your debt. Careful consideration of your sales and knowing where your small business stands would help you avoid that risk.
Merchant cash advance is offered by companies specialized in this type of funding. Not being a loan under the law allows much flexibility. There is no restriction as to how much your interest rate could be (could be negative at times) and there is no restriction on how you could use your upfront funds (positive). It should be noted that this type of financing is designed mainly for small businesses with steady sales that could easily pay off the debt in the short term given.
Merchant cash advance providers reserve their right to adjust their offers. So it is a type of debt that carries both risks and benefits.