Small businesses in recent years have faced significant challenges in obtaining business funding. Businesses require funding if they are to embark on certain projects that promise to help in their expansion since the required funds are not always available within the business. The options open to businesses are quite many, yet it seems obtaining business finance is just a little easier than going to the moon. The main reason for this difficulty is the general reluctance on the part of commercial banks to issue loans to small businesses, especially startups and those with short operating history. The situation could have been very pathetic if not for alternative sources like merchant advance express which have risen to the challenge of making small business finance readily available.
The merchant cash advance industry is one that has experienced unprecedented growth over the last couple of years because of its ability to meet the needs of the vast majority of small business owners. Of course, merchant cash advance providers are not the only ones in the alternative finance industry; there are still other players such as online business lenders, invoice factoring firms, venture capitalists and so on. The alternative finance industry in which merchant cash advance providers occupy a providers occupy a dominant position has recently accounted for more than 4 billion dollars of loans to small business over a period of one year. Although this figure might not seem so significant when one considers the input of commercial banks. However, there are strong indicators that the industry is rapidly expanding. Before taking a look at what firms like merchant advance express have been up to, it is important that we examine what other players in the alternative finance industry are offering and what limitations—if any—they have.
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One common way in which small business can generate working capital is through the process of invoice factoring. It is not unusual for a business to be in dire need of finance while at the same time having plenty of debtors who are yet to pay. This dilemma can be quite challenging for small business owners as there is no actual way of immediately extracting the debt to finance business activities. And it might not also be convenient for the business at that time to turn to commercial banks for loans which it almost certainly not secure; nor will it be feasible for it to approach alternative lenders such as merchant advance express. In such a situation it might be more useful for the business to sell off the debts in exchange for cash. This is just what invoice factoring firms make possible. Invoice factoring firms buy off the debts of a business howbeit at a discounted price. In most cases, the factoring company pays about 70 to 80 percent of the value of the debts.
Once the payment has been made to the business the factoring company becomes responsible for retrieving the debt. Because lending has always been a risk, invoice factoring firms sometimes suffer a loss when they are unable to retrieve the debts. In short, invoice lenders usually determine the likelihood of retrieving the debt before deciding on the how the debts are to be factored. In spite of how straightforward the process of invoice factoring seems, it is nothing compared to loans obtained from sources like merchant advance express. For one thing, it is not possible for a business to get credit higher than the value of debts it has. In short, it will certainly get less than what it has in debts because of the process of factoring. Moreover, invoice lenders are not that common and getting invoice factoring firms to buy debts, especially when they are old and come from small businesses, can be difficult. In essence, invoice factoring is not an ideal source of getting quick business loans of high amounts. As such, one has to look in the direction of merchant advance express and other firms that offer merchant cash advance service.
It was earlier stated that banks are very skeptical of issuing loans to startups, always insisting that a business has to have been in operation for some years. If there is an alternative to commercial banks, that is best suited for startups, then it is venture capital. Venture capital is money provided by private investors known as venture capitalists which are used to build startups. This form of funding is usually ideal for small businesses which have a huge growth potential. These businesses are also those that are very risky. Venture capitalist focus on fast-growth companies that are driven by technology, providing millions and millions of dollars them as the need arises. However, unlike such firms as merchant advance express, venture capitalist particular focus on specific industries. This means that venture capitalists are able to offer advice to business owners on whether or not their business will succeed. But, it also means that venture capital cannot be accessed by most other small businesses which are not technology-based, such as supermarkets and gas stations. Having looked at two popular sources of alternative finance it is time to shift our focus to what has become the most popular source of alternative financing—merchant cash advance.
Merchant Cash Advance
The sort of funding obtained from merchant advance express is known as merchant cash advance. A merchant cash advance is a form of business funding in which a business sells its future receivables at a discounted price to a merchant cash advance provider. From all indications the transaction is simply a business to a business transaction which is structured as a sale. Because a merchant cash advance is not technically a loan, it is not subject to bogus governmental regulations and laws binding on bank loans. Meanwhile, interest is not charged on merchant advances as in the case of commercial bank loans. What happens is that a fixed fee which comes in the form of factoring is paid by the business in exchange for the cash advance. This is how merchant cash advance providers like merchant advance express make their profit.
Who is Qualified for a merchant cash advance?
In spite of how much versatile merchant cash advance is, enabling a wide array of businesses to have ready access to business funding; there are still certain requirements that a business has to fulfill before being issued with an advance, although the requirements are not as stringent as those of commercial banks. The first criterion for obtaining funding from sources like merchant advance express is that business has to accept credit card payments, be it visa or MasterCard. Not only that, the business has to fulfill a huge volume of its transactions through credit cards. The volume of the credit sales must also be large enough to convince the lender that the merchant would d be able to pay back the loan easily. Most merchant cash advance providers will often insist on minimum monthly revenue of $5000. Some lenders peg theirs at a little above that value while others place this way below that. Whatever the case, most lenders will only give a business up to 1.5 times its monthly revenue in advance. It is also required for a business to have been in operation for at least 6 months before it can be issued with an advance. The business seeking funds from merchant advance express must also have a physical location as online businesses are generally not eligible for a merchant cash advance.
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Steps in obtaining a merchant loan
In order to obtain merchant cash advance, the business submits an application to the merchant cash advance provider who then proceeds to evaluate the application to see if the business meets all of the criteria. Once the evaluation has been completed both parties sign the merchant cash advance agreement which is legally binding on both parties. In the case of merchant advance express, this agreement contains the factor rate, withholding amount as well as the total payback amount. The factor rate is determined by the amount that is borrowed, the volume of credit sales and other factors that are peculiar to 6the business. On the other hand, the holdback amount shows the percentage of the daily credit sales that would be automatically remitted to the merchant cash advance provider. The payback process is usually automated by the credit card processor of the business, making it as easy as possible.
The benefits of obtaining business funding from alternative sources like merchant advance express cannot be overemphasized. Of all the benefits associated with merchant cash advance, the one of speed stands out as the most enticing. The fact that a business does not have to wait for weeks or months before obtaining finance is one good reason to embrace merchant cash advance. In addition to speed, there is a high approval rate of more than 90 percent for merchant cash advance as opposed to less than 40 percent for commercial bank loans. One also has to mention that merchant loans are unsecured, meaning that business owners are able to obtain quick business funding without bearing any risks. All in all, merchant cash advance providers have won the hearts of many business people, and the reason for this has everything to do with the immense satisfaction customers continue to derive.