The alternative lending industry has often been considered as disruptive and harmful to the survival of the traditional lending industry. The reason is that of the somewhat radical changes which the industry has introduced to the world of small business lending. Merchant cash advance providers lead the alternative lending industry. Merchant vendors provide the most outstanding service among alternative lenders in general, and it is for this reason that small business owners favor them. Although merchant funding has gained so much popularity in the last couple of years, there are still common misconceptions that people have about it, and it is essential that such are cleared.
What exactly is merchant cash advance?
The question of what a merchant cash advance is and how it can help in the growth and expansion of a business is quite a popular one. The other fairly common question asked about merchant lending has to do with whether or not it is a business lending option better than or at least equal to commercial bank loans regarding cost. Such questions are of course reasonable when one is seeking to understand merchant cash advance in detail. Merchant cash advance in its basic form involves the sale of a portion of the future card sales of business in exchange for a lump sum of cash which is used as working capital. The sale is done at a discount to the merchant cash advance provider, and this is how merchant vendors make their profit.
How do Merchant advance lenders collect their share of the future receivables of the business?
One of the most common methods through which merchant cash advance lenders collect their share of the future credit card sales is batch splitting. In batch splitting the credit card processor of the business is directed to automatically forward the agreed percentage of the daily credit card sales to the merchant lender. After that the remainder of the funds is forwarded to the account of the merchant. This method offers significant benefits, much more than other collection methods. There is more efficiency, reduced costs, and greater control for the business in batch splitting. There are other variations of batch splitting in the form of automatic clearing houses which is useful in repaying the merchant business lending.
Important ways in which a merchant cash advance differs from a loan
Because a merchant cash advance is a sale of credit sales which are yet to occur, there is a significant difference between it and a term loan. The distinction between a term loan and a merchant cash advance goes beyond semantics as some persons are wont to characterize merchant business lending as some loan, at least in the traditional sense of the word. A merchant cash advance has no fixed terms. Instead the merchant cash advance provider is entitled to receive just a fixed percentage of the daily credit card sales of the business. The implication of this is that the exact dollar amount that goes to merchant vendor is based on the volume of sales of the business.
As regards the date of payment, there is no fixed time for the repayment of a merchant cash advance. The concept of late payment which can result in a business being penalized in the traditional business lending setting does not exist in the world of merchant business lending. The time it takes for a merchant loan to be repaid has everything to do with the volume of sales the business generates. If the sales are high, then it can be expected that debt is paid off much earlier than might have even been anticipated by the merchant lender. And if the sales are low, the time it would take to pay back the loan become longer even though most merchant cash lenders would love to recoup their investments in 18 months or less. So in merchant business lending, it is true that the more the business gets paid, the more the vendor gets paid.
The obligation to repay the advance that is absent in merchant cash advance transaction is one other way in which it differs from term loans. In a typical merchant cash advance transaction, the business is not under any obligation to repay the advance. This is simply because business lending in MCA is structured as a sale of future receivables. If these receivables do not come as had been anticipated by the merchant cash advance provider, for one reason or the other, the business is required to pay back the loan using personal assets. Merchant cash advance is therefore tied to the future sales of the business and nothing else, especially when there is no personal guarantee. Nothing here, however, suggests that business is permitted to deliberately engage in acts which could jeopardize the stake of the merchant lender in the business and this is not often the case.
Significant Benefits that Stem from Merchant Cash Advance
There is no gainsaying the fact that the merchant cash advance industry is overgrowing because small businesses have found business lending from mca providers essential for their survival. For most businesses, it is the speed with which the funding can be obtained that matters most. For others, it is the fact that a good credit score is not required before one can be issued with a merchant cash advance that is of utmost importance. Whatever is the reason, the point remains that business lending through merchant vendors is favored by an increasing number of small business owners. One cannot also rule out the fact that reliability has a played a major role in the decision of small business owners to embrace merchant lending. Knowing that with merchant lenders funds could be obtained almost the instant they are needed has enabled businesses to have confidence in the alternative lending industry. This confidence in the alternative lending industry has proven useful for the survival of small businesses in the modern world. Nothing is going to change that.