Small businesses have been responsible for some of the many innovations that we have seen in the real economy. In recent times, small businesses have been at the forefront of a revolution which is challenging one of the fundamental aspects of doing business in our time. The somewhat radical change in the area of small business financing has been one of how small businesses are currently being innovative.
This is because, in the face of a tightening global economy which is almost shrinking and especially since the enactment of the Dodd-Frank Wall Street Reform Act, small businesses have been embracing non-traditional forms of lending, mainly merchant cash advance. The demand for merchant cash advance otherwise known as instant cash advance has been rising ever since.
It has been suggested that in a short while, alternative lenders led chiefly by merchant cash advance providers will assume reins over the encompassing lending industry, leaving commercial banks with no choice but to re-evaluate their lending policies. It is, therefore, so that we consider what merchant cash is in detail, and, if possible, compare with other forms of lending.
Learning more about merchant cash advance
To appreciate merchant cash, it is beneficial we don’t view it from the perspective of a loan even though it bears similar characteristics with a loan. Merchant cash advance is still a transaction in which a lender offers cash to a business that is in need of it in exchange for something which is to be received by the lender at some point in the future.
An instant cash advance, however, differs from a traditional loan in several respects. First, an essential characteristic of a loan is that there is an explicit agreement on the part of the borrower to repay the loan. This fact itself is stated very clearly in the loan documents and is understood by both parties as such.
In contrast, an instant cash advance transaction does not carry along the promise for repayment. This is to say the borrower—in this case, a small business merchant—does not agree to repay the loan unconditionally. This directly stems from the fact that a merchant cash advance transaction is primarily a commercial transaction in which the merchant cash advance provider obtains a stake in the future receivables of the business in exchange for a lump sum of cash.
In essence, a merchant cash advance transaction is one in which the business sells a percentage of its future credit and debit card sales—whether such sales would eventually occur is a different matter.
Another area in which an instant advance and a loan differ is in the way the contract is structured. For a merchant cash advance, the terms are not precisely fixed and can be said to be quite flexible. For example, there is no set period for the repayment of the advance. Unlike in a commercial bank loan where a business is expected to repay the loan over a fixed period, the same is not likely of merchants in an MCA transaction.
How about the span of payment? The duration it takes to complete the payments will have everything to do with the volume of sales recorded during the sales period, except for a few cases where the business has agreed to contribute a fixed amount towards the repayment of the instant cash advance. An act which makes merchant cash advance characteristically close to a loan.
Of course, merchant cash advance providers generally wish to recoup their investments in less than 18 months—which is why they generally issue loans that are two to four times the monthly sales of the merchant. However, the reality is that merchant vendors cannot be specific when loans would be repaid since sales could and do fluctuate. Above all an instant cash advance does not attract interest like a loan would; instead, merchants pay a fixed fee in the form of a unique factoring, eliminating situations in which interest could accumulate.
What is the process of receiving a Merchant Cash Advance?
If a business happens to be interested in having an instant cash advance, the first procedure it usually embarks upon is to approach a merchant vendor and fill out the advance application form. Once this has been done, it is the responsibility of the merchant cash advance provider to determine if the business meets all of the requirements.
Some of the typical requirements a business might have to meet are having a minimum monthly credit card sale of above $4000, having a physical location. The most important of them all which should be very obvious, it must accept credit card payments and fulfill the vast majority of its face to face transactions using either Visa or Mastercard.
If the business capably fulfills all of the requirements, then it would proceed to examine the terms of the contract embodied in the merchant agreement. It is this document that contains such things as the factor rate, total payback amount, as well as the retrieval rate. The factor rate is often less than 1.5 and is used to multiply the instant cash advance to arrive at the total amount the merchant gets to pay since this is how merchant vendors make a profit.
In a similar vein, the retrieval rate is the percentage of the daily credit card sales that is deducted from the merchant to repay the advance. The process of daily payments continues until the advance has been repaid; after this, the merchant vendor loses its stake in the future receivables of the business.
Why small businesses are tilting towards Merchant Cash Advance
As was said in the beginning, small businesses are spinning their attention to alternative lenders especially merchant vendors who offer instant cash advance. The reason for this is that obtaining a loan is very easy and straightforward with merchant cash advance. While it could take months for a bank loan to be processed, it could take a few days for an instant cash advance to be fully processed.
One does not even need to emphasize the fact that a business does not require collateral or a good credit score before it can be issued a cash advance. And although a merchant loan is relatively more expensive than a conventional loan, it can be said that it’s a fact that the loan is unsecured compensates for this. In any case, a business in dire need of cash will always find merchant vendors to be more useful since it can almost be certain that it would get the funds as approval rates for merchant loans have been found to exceed 90 percent. It is easy for one to now understand why merchant cash advance providers have been very successful with small businesses owners.