The cash flow problem that many businesses have is widely known as one of the biggest facing small-scale businesses at the moment. Closely related to this problem is that of obtaining business credit to avoid disruptions to the cash flow of a business. It is also common for a business to seek external funding for investment purposes when the company cannot generate the required funds from within the business. This latter scenario is one that is quite common, and businesses have had to find ways of obtaining credit. That small businesses are always on the lookout for bad credit loans is something that can hardly be denied. But traditional financial institutions such as commercial banks do not issue such loans. Since that is the case, merchants have had no other option but to look in the direction of alternative lenders. Alternative lenders, ever since their emergence some two decades ago have sought to bridge the gap that exists in the traditional lending sector.
Merchant cash advance providers, in particular, have been at the forefront of the revolution brought about by alternative lenders. For some reasons small business owners consider merchant cash advance providers to be the number one source of bad credit loans. Be that as it may, there are other reasons why small businesses have been found to lean towards alternative lenders in general and merchant cash advance providers in particular apart from the fact that they offer loans for which they request much lesser credit scores than commercial banks. Some of these other reasons shall be examined. But for now suffice it to say that while traditional lenders will often insist on a minimum credit score of about 650, merchant cash advance providers require a score of just about 500 for a business to have access to so-called bad credit loans. Of course, there is more to merchant cash advance than the fact lower credit scores are involved. So it is time we examined merchant cash advance in detail.
Taking a closer look at merchant cash advance
Merchant cash advance can be said to be a commercial transaction which involves two businesses. The parties involved are the merchant that is in need of bad credit loans and the merchant cash advance provider. In this transaction, the merchant agrees to sell a portion of its future credit card receivables to the merchant lender in exchange for a lump sum of cash which can be made available in the shortest possible time. Because this transaction is a sales transaction, the merchant lender is not provided with collateral or any other form of personal guarantee. The point is that the advance is only secured against the future credit card sales of the business and hence the business cannot be held liable it is unable to pay back the advance. Once the business files for bankruptcy, it is charged from the agreement and the merchant cash advance provider loses his investment.
It follows therefore that bad credit loans are much different from conventional bank loans and indeed there are subtle differences between those. For one thing, merchant cash advance does not attract interest payments, and so the issue of accumulated interest does not come up. There are also no fixed terms in a merchant loan agreement; the business cannot be punished for failing to meet up with deadlines; it cannot also be rewarded for early payments. Indeed, the time it takes bad credit loans to be cleared off depends on the volume of sales the business generates over the given period even though merchant lenders would want to recoup their funds. It seems that just about everything in merchant cash advance is tilted in favor the business. Having said that let us look at how the whole process of obtaining merchant cash advance works.
The Process of Obtaining Merchant Cash Advance
The factor rate and the holdback amount are two of the most important considerations for bad credit loans. The factor rate is the amount which is often below 1.5 which is used to factor the actual cash advance was a way of generating some profit for the merchant vendor. Before the factor rate is determined, some factors are usually put into consideration. First, the amount of monthly credit card sales of the business is considered as this is what determines how quickly the loan can be paid off. The actual amount that is borrowed is also considered. Above all the time frame for the repayment from the perspective of the merchant, the lender is also considered. Similar considerations are also made for the holdback amount which is the percentage of daily credit sales which is remitted to the merchant lender. For bad credit loans transactions, daily payments are made from sales until the advance has been repaid.
Is merchant cash advance something that businesses need?
Just a few persons will contend that getting loans from traditional sources has not become more difficult than ever before. With the increased rate of small business failure, one cannot be surprised that commercial banks, in particular, seem to have imposed more stringent rules concerning loans. This has made it that around 70 percent of small business owners who were in need of funding did not even bother approaching commercial banks in the first place. Bad credit loans provided by merchant cash advance providers naturally became the next option for businesses in this category. There is no doubt that the speed with which merchant loans can be obtained is something that keeps drawing small businesses to merchant vendors. One might also want to look at the less hectic process involved which has a lot to do with the fact that only minimal documentation is required. Small businesses are also aware that the probability of obtaining bad credit loans is much higher than that of conventional bank loans. It is not surprising therefore that more and more businesses have embraced merchant cash advance.