There has hardly been a better time for the merchant funding industry than now. We live in a time when the demand for business funding coming from small businesses, in particular, seems to be at an all-time high. This might appear to be an overstatement until one begins to look at the findings from some of the most recent studies. Experts are currently of the opinion that there is an estimated 80 to 120 billion dollars’ worth of unmet funding needs. This is a staggering figure but not surprising given that there about 57 million small businesses in the United States. One other thing to know is that is that around 70 percent of small businesses that were able to secure funding have confirmed that getting the full amount that was needed was not possible. In the midst of all of these, there are indicators that the alternative industry, particularly that section of it which makes merchant funding available, is more positioned to meet this huge the demand which continues to rise than traditional financial institutions such as commercial banks.
In the last two decades, merchant cash advance providers have witnessed rapid growth—much more than anyone could have imagined. But here we are two decades after the emergence of merchant cash advance. Just 18 years after the industry came to light, precisely in 2015; the merchant cash advance industry was worth more than 10 billion. As of now, the entire industry is valued at more than 15 billion with more than twenty thousand merchant advance companies competing furiously with one another. The level of competition in the merchant funding industry exceeds that which obtains in the traditional lending sectors. Though merchant cash advance deals are smaller than those of commercial banks, they still serve the essential purpose of meeting the needs of small businesses. The average merchant cash advance transaction would typically involve about $25000, which in most cases is used for investment. In spite of the remarkable success of merchant vendors, it is surprising how it is that lots of people in business do not seem to have a thorough understanding of what it is and how it works. It is our purpose, therefore, to illuminate on merchant funding concerning what it means, how it works, and the benefits that a small business might derive from utilizing merchant cash advance for its financial needs.
What exactly is Merchant Cash Advance?
The first step in understanding merchant cash advance is to appreciate the fact that it is not a loan in the traditional sense of the word even though it has some remarkable similarities with a loan. On the one hand, a loan is an amount of money which a lender issues to a borrowing business which imposes an obligation on the borrower to pay back the loan in addition to interest. The payment schedule for a loan is fixed while it is not in the case of merchant funding as we shall see. On the other hand, a merchant cash advance is a mere business-to-business transaction in which the merchant sells a portion of its future credit card sales to the merchant cash advance provider in exchange for a lump sum of cash.
Unlike what obtains with a commercial bank loan, a merchant cash advance does not call for a fixed repayment schedule; that is to say that there are no fixed terms with merchant funding. Also significant is the fact that in a merchant cash advance transaction there is no obligation on the merchant to repay the loan. Because it a sale secured against the future receivables of the business alone, it goes to say that once the business is unable to deliver as had been anticipated the lender is made to suffer a loss. One other thing that differentiates an advance from a loan is the issue of regulation. While loans typically fall under the purview of governmental bodies which regulate the industry, the merchant funding industry is by and large unregulated despite recent calls for it to be. All of these factors emphasize that a merchant cash advance for all intent and purposes is markedly different from a loan.
How does merchant cash advance work?
The core elements of a merchant cash advance transaction are the loan amount, factor rate, as well as holdback percentage. The loan amount is, of course, the amount which is issued to the business in the first place. But firms providing businesses with merchant funding also have to make a profit, so a fixed fee which is not an interest charge per se is incorporated into the transaction through factoring. Factoring results in the business having to pay back about 15 to 25 percent of the amount that was borrowed. Using merchant cash advance technology, this could mean a factor rate of 1.5 and 2.5 respectively. In a similar vein, the holdback percentage is the amount of the daily credit sales that is remitted to the merchant cash advance provider. It is often less than 20 percent and depends on the amount that is involved and the expected duration of payment. Having said that once the agreement has been reached payment is made on a daily basis to clear until the merchant funding is paid off.
Why small businesses should opt for Merchant Cash Advance
There are several reasons a small business should give serious thought to merchant funding. One such reason is that affords it speedy access to business funds—much more that can be realized with commercial banks. It is also a fact that the credit score requirement for a merchant cash advance is much lower than that required for bank loans. Also, there is no requirement for collateral, nor is there a need for personal guarantees. This means that the business bears no risk in borrowing from merchant vendors. Above all, a high approval rate means that a business can lean on merchant funding during critical times. There is no doubt that it is for these reasons that the merchant cash advance has witnessed rapid growth that is expected to continue.