Merchant Advance and Small Business Financing
Merchant advance providers have become one of the leading sources of alternative financing in the last few years. The growth of the industry is something that has come as a surprise to very many people. Just a few years ago, there were a little more than hundred merchant cash advance providers in the whole of the country; today there are more than a thousand merchant cash advance companies spread across the entire country. At present leading financial service companies such as PayPal have all ventured into the merchant cash advance business, underscoring the fact that the industry is one with enormous potentials. Even though the rapid expansion of the industry is something plenty of people found surprising, it can be said that the more perceptive folks in the business world saw it coming. Because merchant advance providers were poised to fill the vacuum created by the traditional lending institutions, it was not long before they won the hearts of plenty of business owners.
In spite of the remarkable success of merchant funding, there are still those who remain skeptical of it for reason of cost. Granted, a merchant cash advance is somewhat more expensive than a conventional bank loan. But the picture is nothing close to what skeptics have painted. Skeptics portray that merchant funding is a funding option that is likely the most expensive financial product currently in the market is at the very least misleading. In any case, the relatively higher cost of merchant cash advance is something that is justified. This is because it is the norm for a lending firm to charge interest in proportion to the risk that it undertakes in lending money to a specific borrower. The relatively cheaper cost of bank loans can be understood in the light of the fact that banks take minimal risks as compared to merchant advance providers since they insist on collateral and personal guarantees from borrowers while merchant cash advance providers do not. Because the risk borne by merchant vendors in issuing cash advances to small businesses is maximal, it is only reasonable that very high-interest rates should be charged. Even at that, merchant vendors do not charge interests; instead, they insist on fixed payments for the service. In short, if one is to compare the benefits of merchant advance funding with its cost, one might conclude that benefits probably outweigh the cost.
Read More: Choosing Between a Business Line of Credit and a Merchant Cash Advance
What exactly is Merchant Advance?
A merchant cash advance in its purest form is a transaction between a business and a merchant cash advance provider where the business agrees to sell its future receivables to the merchant in exchange for cash. This is precisely what makes it from a loan: it is a sale of future credit sales of the business and nit agreement in which the business receivables a particular sum of money promising to pay back that same amount plus interest unconditionally, at some specific time in the future. The payment of a merchant advance is firmly tied to the success or failure of the business. If the company succeeds, the payback will proceed as agreed; but if the business fails, the merchant cash advance provider cannot make claims against the business for supposedly failing to pay.
Merchant cash advance is a much more flexible source of business financing as it offers businesses options when it comes to how the debt is repaid. On the one hand, a fixed percentage payment schedule ensures that it is only the agreed percentage of the daily credit sales that is remitted to the merchant vendor. The apparent advantage of this method in the repayment of a merchant advance is that the business pays in proportion to how much it earns. When the sales are high, the actual amount spent goes up, and when the sales are low, the reverse occurs. On the other hand, however, the method of fixed cash payments can be adopted for those that want an advance repaid at some specific time. Even though this sounds reasonable, many businesses do not opt for it because it tends to impose a significant strain on cash flow. Let us consider some of the requirements for a company to obtain a merchant advance.
Requirements For Merchant Cash Advance
For a small business to receive a cash advance, there are specific minor criteria it has to meet. First, it must accept credit card payments and must be generating a significant amount of monthly revenue. For most merchant advance providers, a business has to be processing at least $5000 worth of credit sales each month before it can be issued a cash advance. A company is also expected to have a minimum credit score of around 500 before its application for a merchant cash advance can be accepted. Furthermore, a business is supposed to have been in operation for a minimum of 6 months before the date of applying for the advance; however, some new merchant vendors accept businesses that have been in operation for only six months.
Read More: The Difference Between Loans, Cash Advances, and Factoring
Why Small Businesses Are Embracing Merchant Advance
Merchant advance is no doubt popular among small business owners because of the ease with which it can be obtained. Anyone who has applied for a bank loan in the past regardless of whether they got it or not can attest to how easy getting a merchant cash advance is. Only a few documents are required: the financial statement for the previous few months, business registration documents, and the likes. The speed with which an advance can be obtained is also something that is remarkable. While conventional loans could take months to process, a merchant advance could be prepared in less than 48 hours depending on the amount that is involved. Whichever way one looks at it, businesses are very much interested in obtaining funding quickly as they are in getting them in the first place. Most importantly, the chances of getting a merchant cash advance are much higher than that of getting a loan. Businesses have realized this, and that is why they quickly turn to merchant cash advance providers when in dire need of cash.
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