What is Merchant Advance and How Does it Work
Irrespective of the business size, there comes a time when organizations experience a financial crunch and are in need of immediate funding. It can be a trying time for the business owner. Even if your company is not experiencing a cash crunch, an extra infusion of cash might be required to meet financial needs. Whether you want to replace the outdated IT equipment, purchase new machinery, or manage a steady cash flow stream, you require finances to take care of it.
If you are a startup or a small business that is looking to get access to quick funding right away, merchant advance is a viable option to help you. If you are not getting enough help from traditional lenders or you do not qualify for a bank loan and other related loan options, you should consider opting for a merchant advance. It is a unique financial product that gained immense popularity over the past few years. Also, Merchant Advances offer numerous advantages to small business owners who struggle to obtain financing to cover economic gaps.
As a business owner, you do not have to worry about showing a good credit score, credit history, tax returns, or other financial statements to borrow money. The lender only needs assurance that you can repay the borrowed amount after a certain period. Thus, the merchant cash provider will just ask for recent credit card statement to determine the average monthly sales you are making currently. Apart from this, very little or no paperwork is involved to evaluate your application. If you are generating sufficient credit sales on a monthly basis, you are likely to get the funding from a merchant cash advance lender.
Furthermore, the funding is usually processed in a matter of hours and days making it easily accessible for the small business owner. If you are looking to get access to immediate funding to take care of an urgent financial need, this is an ideal option. In summary, merchant cash is a quick way to obtain funds, and your credit history does not affect your ability to get the advance.
Read More: Choosing Between a Business Line of Credit and a Merchant Cash Advance
What is merchant cash?
In simpler words, merchant cash is a ‘lump sum’ capital you require in return for your future credit card sales and receipts. The amount is repaid on a daily or weekly basis depending on the terms agreed with the lender. This is one of the quickest and easiest ways to get financing without having to offer collateral to the lender. Need not worry about the low credit score as well; an MCA has got you well covered!
How does merchant advance work?
Over the past few years, merchant cash has been one of the most prominent alternative lending options among startups and small businesses. The choice is primarily available for those companies who accept credit and debit card sales and earn revenue from it. A good example is a retail shop or restaurant. However, with time, lenders have also started to offer to finance those businesses whose revenue is not dependent on credit or debit card sales.
To be fair, a merchant advance is typically not considered a loan. This is because of how the way things are set up to complete the deal between both parties. You will receive an upfront sum of cash in return for giving up on a chunk of your future credit or debit card sales.
There are two ways in which merchant advance repayments can be structured. The first method is to get an upfront sum of cash and in return give a chunk of your future credit sales. In case you do not prefer this, you can receive upfront cash which you can repay by submitting fixed daily or weekly debits from your bank account. This method is also known as Automated Clearing House or ACH used for withdrawals.
Majority of the startups and small business owners prefer ACH as a type of merchant advance. The providers who specialize in this offering are referred as ACH merchant advance lenders who market it to businesses that are not relying on credit and debit card sales.
Hence, with merchant advance you have flexible repayment terms. Businesses now do not have to be concerned about making fixed monthly payments for a set number of months or years. Instead, you can choose to make daily or weekly payments from the credit sales generated until you have repaid the borrowed amount in full, plus the fees.
The amount of fees that you are bound to pay is determined by evaluating you’re your ability to repay the amount. A factor rate is applied on the borrowed amount that ranges from 1.2 to 1.5, depending on the lender you choose. Your merchant cash will perform the risk assessment to decide the factor rate – the higher it is, the higher the fees you will pay.
In case, you are still confused – let’s have a look at a more detailed breakdown of how these repayment terms are structured:
Percentage of credit card sales – In this repayment mode, the Merchant Advance lender will be automatically deducting an agreed percentage of your credit or debit sales. The process will occur on a daily or weekly basis until the amount is repaid in full.
Merchant cash advances are short term financing options – thus, they are required to be repaid within a year. Therefore, when you choose the percentage of credit card sales as repayment term, it all depends on the credit card sales you are generating. The higher the sales, the faster you are going to repay the amount.
Fixed daily withdrawals – You will be required to make daily or weekly payments by the monthly revenue you generate. For instance, if you are a business that brings in $100,000 in monthly revenue, you will repay $333 on a daily basis or $2,331 on a weekly basis on a percentage of sales of 10%.
Another good thing about merchant cash advances is that the repayment amount does not fluctuate with your sales. As they are tied with credit or debit card sales, the amount you bring in on a daily or weekly basis will determine how much you repay.
Read More: The Case for Cash Advance Companies
Why small business owners opt for merchant advances
There are numerous reasons why small businesses choose MCAs over other traditional and alternative lending options. Some of them are as follows:
- It is one of the easiest and quickest way to get funding whenever required. Online lenders are now approving applications in a matter of hours, and your desired capital will be in your account within a day or so. Also, there is less documentation involved saving business owners’ time and hassle. All you have to do is accept credit or debit card payments and generate sufficient sales to repay the amount within a year.
- There is no collateral required whatsoever. Therefore, there is no way you will be losing your personal or business assets or belonging to obtain the required financing. Merchant advances are unsecured, and you do not have to include any assets in the deal that you might lose in case you fail to repay.
- The repayment is dependent on your sales. When sales are high, your payment will be too and vice versa. With merchant cash advances, repayments are adjusted according to your business performance.
These are few of the many reasons why Merchant Advances gained immense traction over the years.
Despite being an excellent option for startups and small business, there are some downsides to this financial product as well. The caveats for merchant cash advances are as follows:
- The alternative lending industry is still unregulated which means the repayment terms are dependent on the future credit or debit card sales. Therefore, it is essential to perform your due diligence when it comes to choosing an MCA lender.
- The fees that you are charged on the overall borrowed amount also plays a critical role whether you should or not select MCA. Depending on the lender, they can charge a variety of fees. Thus, it is advised to shop around and look for multiple options before making a decision. Choose a lender that quotes the lowest factor rate so that the overall amount which you have to repay is not high.
Hence, in a nutshell, merchant advances are becoming an increasingly popular option where this form of unsecured funding is the easiest way to get immediate funding. Whether you are looking to grow and expand, purchase equipment, or pay off salaries to the employees, merchant advances are an ideal option to get you through the rough times.
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