Merchant advance funding is one of the leading ways through which small businesses obtain the much-needed working capital without having to resort to commercial banks or business credit cards. With 61 percent of small businesses finding it difficult to obtain financing from traditional sources, there is hardly a better for alternative lenders in general and merchant cash advance providers in particular. Of course, it has been shown that there about 10 billion dollars’ worth of unmet business financial needs. Traditional lenders alone cannot meet this need. The need, therefore, of merchant cash advance lenders cannot be overemphasized.
Merchant cash advance definition
It is quite difficult to put forward a single definition of merchant cash advance. But it is often sufficient for it to be considered as a commercial transaction which involves two businesses. In this transaction, the borrowing business which shall after that be referred simply to as the merchant sells its future receivables to the merchant advance funding provider. In return, the business obtains cash which is used for growth and expansion.
In what ways is a merchant cash advance different from a traditional loan?
A loan in the conventional sense of the word has several characteristics. One such characteristic is that loans attract interest payments. It is the interest payments that serve as a reward to the lenders for the risk of borrowing money to a business. Merchant cash advance does not involve something called interest. Rather the actual cash advance is factored to result in a fixed fee that is paid by the borrowing business.
Speaking regarding interest, this fixed fee often translates to around 15 to even 40 percent of interest. Obviously, this is something that is quite high when compared with interests charged on, for example, term loans. The reason for this is that merchant advance funding providers take a greater risk when lending than traditional lenders. The fact is that merchant cash advances are unsecured and the transaction is only guaranteed against the future credit card sales of the business.
The situation is, of course, a challenging one. But businesses that have been unable to obtain funding from traditional sources for a reason bordering on the inability to provide collateral or bad credit score can fully appreciate the importance of merchant lenders. In reality, the terms of the transaction might be much more attractive than what has been stated if the bossiness can demonstrate its ability to pay back the advance. As it is with conventional bank loans, so also is it with merchant advance funding. For the lower the perceived risk, the lower the charge the borrower has to pay.
What kinds of businesses are merchant loans suitable for?
Not all forms of businesses are best suited for merchant cash advance. Because everything about a merchant cash advance rests on the future credit card sales of the business, only a business that fulfills a large volume of business transactions using credit cards will find the option of merchant advance funding quite attractive. Typical candidates for this are retailers, restaurants and gas stations. Other businesses that do not fit into this category but generate a significant amount of revenue from credit sales are also eligible.
The second category of businesses that might be drawn to a merchant cash advance is those who want business funding almost instantly. Such situations often arise where a business needs funding to meet an unexpected business need, or it might need the funding to quickly take advantage of a business opportunity. Whatever is the reason business is in dire need of funds, merchant advance funding remains a great choice.
What is involved in a typical merchant cash advance transaction?
There are written and unwritten aspects of a merchant cash advance transaction as we shall see. The written aspect of the transaction revolves around such things as the factor rate, holdback percentage, and the total payback amount. It is the issue of factor rate and holdback percentage that forms the crux of merchant advance funding transaction. For the factor rate, is what is used to determine how much the business pays back and is often between 1.2 and 15. This means that a business pays back from 20 to 50 percent more of what it borrows.
In a similar vein, the amount that the business commits to the repayment of the loan each day is determined by the holdback percentage. In most cases, this does not exceed 25 percent. But the amount that was borrowed, coupled with other factors like payback period contribute to shaping how much that this turns out to be. Once the funds have been issued to the business, repayment starts immediately and continues until the cash advance plus the fixed fee has been paid back. This is essentially what merchant advance funding is all about.
What is the advantage of the payment method of merchant cash advance?
One thing that one finds with most merchant cash advance transaction is that repayment schedule is quite flexible. A business has a choice between a fixed amount and a fixed percentage of the daily credit card sales. The advantage obviously lies with the method of a fixed percentage. It is because it enables a business to pay according to how much it is generating. Unlike term loans, merchant advance funding does not impose much strain on the cash flow of a business. It is exactly why the overwhelming majority of small businesses opt for this method of payment.
Some unwritten aspects of merchant cash advance transactions
To conclude it is important that we point out some of the so-called unwritten elements of merchant cash advance transaction. The truth about mca loans is that merchants do not agree to repay the advance since it is in effect a sale. This means that the merchant vendor can only recoup his funds if the business can stay afloat. Of course, these issues might not be admitted by both parties at the beginning. But it is implied in any merchant advance funding agreement. These are some of the problems that a closer examination of merchant cash advance has shown.