It is not unusual for a business to seek alternative finance in order to for it to stay afloat during hard times. Indeed, businesses would often require financial assistance when they need to expand, purchase a new piece of equipment, or even to settle outstanding debts when they are hard pressed by creditors. In most instances, small businesses look to commercial banks in order to obtain the funding required for business activities. While a handful of businesses have been able to secure such loans, there exists a great number which have been unable to do so, and which have no choice but to seek alternative finance from non traditional lenders. Non Traditional lenders are actually rising to the challenge of meeting the financial needs of small businesses which have been unable to access conventional loans. And the alternative finance industry has witnessed rapid growth, especially since the economic recession of 2008 where overall bank lending to small businesses fell by 20 percent. In fact, one survey showed that more than 50 percent of loan applications from small business owners were turned down by commercial banks; while a significant proportion of small business owners did not even bother to request bank loans.
Indeed, there are numerous options available to small business owners who are seeking business funding from the nontraditional sources. And regardless of the operational differences of these lenders, they all claim to be perfect alternatives to loans from traditional financial institutions such as commercial banks. Non Traditional lenders all seek to eliminate the hindrances that small businesses are known to face when seeking commercial bank loans. In general, alternative finance is much easier to obtain than regular loans. Most non traditional lenders also require minimal documentation and some even go as far as issuing loans to businesses with poor credit as well as those that are not even profit. Startups are also catered for in the world of alternative funding. In spite of all these similarities between the various lenders in the industry, there are subtle differences also—which could be the difference between the success and failure of a small business. This is where the problem lies as firms now find it increasingly difficult to decide on which form of alternative finance is best suited for them. But then, alternative lenders such as merchant cash advance providers are worth taking a closer look at since they have been at the forefront of the alternative business finance industry for some time. In taking a closer look, we hope to reveal the many advantages of merchant cash advance, and how it suits small businesses.
What really is this Merchant Cash Advance?
A merchant cash advance is a form of alternative finance which is not characterized as a loan—at least in the usual sense of the word. Merchant cash advance is actually meant for firms which already accept credit card payments and which fulfill a large chunk of their face to transactions through credit as well. One area in which a merchant cash advance is similar to other forms of business funding is that it involves the same principle of receiving a lump sum of cash and paying back a little more than what was received over a given period of time. But in the case of merchant cash advance, the period of payment is not exactly fixed as in the case of commercial bank loans. Moreover, there are no penalties for late payments neither are their rewards in the form of lower interest rates as in the case of commercial bank loans. In addition, merchant cash advance loans so to speak do not attract interests. As a form of alternative finance merchant cash advance transactions is not regulated by both federal and state governments; so laws that govern loan agreements generally do not apply. That is not to say that everything goes in a merchant cash advance transaction: actually, such laws as the fair credit reporting act, uniform commercial code for each state hold sway in MCA transactions.
To be precise, a merchant cash advance transaction is a commercial transaction between a small business known as the merchant and a lending firm which offers merchant cash advance. In this transaction, a merchant cash advance agreement is signed, granting the alternative finance provider the right to receive a portion of the future credit card sales of the merchant. In the way a merchant cash transaction is structured, it can be said to be essentially a sale. The merchant sells its future credit card sales to the merchant cash advance provider in exchange for a lump sum of cash. The merchant, because the sum received will be worth more at a later date when it is supposed to pay it back, sells the future receivables at a discounted price to the merchant cash advance provider. So the amount that is given to the merchant is multiplied by a certain factor in order to arrive at the total amount the merchant is to pay back. This is how merchant cash advance providers generate profit: the difference between the loan amount and the factored amount.
What are the requirements for a business to receive a merchant cash advance?
Merchant cash advance is best suited for small and medium-size firms which make large credit card sales on a consistent basis. Some firms in this category are such firms as restaurants and gas stations. Seasonal businesses might not exactly find this form of alternative finance worthwhile. The reason for this is that merchant cash providers require repayment on a daily basis. If a seasonal business takes a cash advance, then it must lay solid plans on how it is meet up with the payment schedule during the off-season period—or, at least, understand that having a portion of its revenue deducted during the off-season period could place a significant strain on its cash flow. So, apart from businesses which do not make consistent credit sales or those businesses which are seasonal in nature, virtually every other small and medium-sized business is qualified for a merchant cash advance. And regardless of whether the merchant loan is required to obtain some new machinery, to pursue business expansion, or even to offset pre existing debt, merchant cash providers are ready to issue the needed funds. One other thing which makes a merchant cash alternative finance particularly useful to small businesses is that if the business finds itself in an emergency situation it can easily request for an additional advance from the same provider even if the previous one has not fully repaid.
How much money can a business obtain from Merchant Cash Advance providers?
Generally speaking, merchant cash advance is a source of alternative finance, does not offer as much cash as a traditional financial institution like a commercial bank which has a stronger financial base Instead, merchant cash firms will typically loan a minimum of $10,000 and a maximum of $500,000. What determines how much a business gets in the way of a cash advance is its volume of monthly credit sales. Usually, merchant cash advance providers will only fund as much as four times the monthly credit sales of the business. One other factor that plays a major role in the number of funds a business receives is its nature, that is, whether it is seasonal or not.
Benefits that come from using merchant cash funding
Of all the reasons that attract business owners to alternative finance speed and ease stand out as the foremost on the list. For everyone in business knows how hectic it is to obtain funds from commercial banks. And apart from the usual bureaucratic delay, it is quite difficult, frankly speaking for start-ups and business which do not have a strong relationship with the commercial banks obtain funding from them—especially in emergency situations. This where a merchant cash advance becomes very useful since it is a fact that it takes about less than one week for a loan request to fully processed. In addition, the approval rate for merchant loans is quite high as compared to those of commercial banks and other traditional sources. One reason for this huge success rate with merchant cash advance is that a good credit score is not necessarily considered in the decision-making process of the lending firms. In addition to not requiring a good score, merchant cash firms also do not insist on collateral as do other most other alternative finance lenders before cash advance is obtained.
But then, there are some business persons and financial experts who object to getting merchant cash advance because of its relatively high cost. Of course, there is no gainsaying the fact that that merchant cash advance is quite expensive, but, most business owners who have made use of merchant cash advance can attest that the highs of a cash advance more than compensate for the lows, and as such remains the preferred option to business owners who are desperate need of financial assistance to keep their businesses afloat.