The entire merchant cash advance industry is one that is geared towards providing business loan help to small business owners. This is quite important since small businesses are increasingly finding it difficult to obtain financing. Small businesses ought to have access to funding as they are responsible for the employment of almost two-thirds of the American population.
Before this time, small businesses relied on traditional financing institutions, mainly commercial banks to obtain funding but the situation is quite different now. Over the last couple of years more and more small businesses are being funded by lenders outside of the financial mainstream. Merchant cash advance providers are representative of such alternative lenders, and as of now, they have spent billions of dollars funding small businesses.
The reason for the shift towards alternative lending
The option available to a business in need of a business loan help a few years ago after being denied by a commercial bank were often quite limited. In most cases, a business had credit cards or microloans to turn to. But the emergence of merchant cash advance has changed opened a whole new window of opportunity for business owners. But the reason for the sudden shift towards alternative lending has to be accounted for in one way or the other.
The economic downturn and increased government oversight
It has been observed that small businesses needing business loan help of fewer than 1 million dollars are being denied on a regular basis. For according to a report by the federal deposit insurance corporation loan applications to commercial banks that are under the said amount have been denied consistently each year since the financial crisis. It was also estimated that the current level of funding to small businesses is 20 percent less than what it was before the recent economic recession.
Ironically loans above one million which often go to big businesses are issued on a more consistent basis. One state saw a decline in commercial bank lending to small businesses through the small business administration, SBA, by as much as 60 percent between 2007 and 2013. One report even had it that the way loan applications were being denied meant that around 8000 requests for business loan help were being denied each day. Little wonder why small businesses quickly turned to merchant cash advance providers as soon the opportunity presented itself.
Problems at the micro level
At the micro level, a significant portion of small businesses is yet to recover from the effects of the economic recession. The implication of this is that the revenue of the businesses in question, credits, and collateral might not be able to support requests for business loan help in most of the cases. Even in areas where community banks used to be responsible for a significant portion of the lending the situation has been very much different. Some of the community banks have closed or are consolidating as a result of the financial crisis. Merchant cash advance providers are in contrast gaining more stability each passing day and as such are better positioned to offer financial assistance to small business owners.
One more reason that might have been responsible for the shift towards alternative lenders for business loan help is increased government regulation. Commercial banks are now more heavily regulated than was the case in time past before the economic recession. Such regulations make it more costly for banks to process smaller and riskier loans particularly those going to small businesses. Because of all of this, it appears unlikely to many that the banks will take the number one spot they once had on the issue of small business lending. This, of course, leaves the door open to merchant cash advance lenders.
How does merchant cash advance work?
Merchant cash advance lenders provide business loan help to small businesses but not in the same manner as commercial banks or other traditional financial institutions. To provide financial assistance to a business a merchant vendor offers to buy a portion of the future credit card sales of the business at a discounted price. If the business agrees to the deal then it also agrees that a certain portion of its daily credit card sales is to go the merchant cash advance lender towards the repayment of the advance. All things being equal the business continues to make daily payments until the advance has been fully repaid.
Basic principles of a merchant cash advance transaction
The agreement between a merchant vendor and the business seeking business loan help contains some of the overt principles of a merchant cash advance transaction such as the factor rate, the payback amount, as well as the holdback percentage. Still, there are other implicit agreements in the transaction. For instance, by choosing that a business commits a fixed percentage of its daily sales to the repaying the advance, the lender agrees that there is no fixed time for the repayment of the advance.
This means that as long as the business is faithful in paying the agreed 10 percent, for instance, it does not matter how long it takes to pay back. The fact that the transaction is a sale and unsecured also means that if the business fails, the merchant is not liable to pay back the business loan help through personal assets. Most importantly, because what transpires in a merchant cash advance is a commercial transaction, the merchant lender is not expected to report business performance to credit bureaus. If both parties honor all of these principles, the result is always a seamless transaction between two business entities.
Small businesses will often choose to seek business loan help from merchant cash advance because it saves them time. One can only imagine the relief small businesses feel knowing that they can obtain funding in a matter of days or even hours as the case may be. Even though merchant cash advance is relatively more expensive than conventional loans, the benefits associated with it such as high approval rate has enabled small businesses to have confidence in it. And in spite of the many challenges, the merchant cash advance industry has continued to wax strong.