How Merchant Cash Advance Can Be a Good Source of Business Finance
There is hardly any business enterprise that has not at one point or the other decided on seeking financial assistance in the form of business finance. It is often the case that a business is unable to raise the much-needed capital required to finance either expansion or buying new of equipment on its own.
This is especially true for small and medium scale enterprises. But getting business funding is not exactly easy for most firms which would rather find it quite difficult to meet up with the stringent criteria for getting loans from commercial banks.
There are quite a number of alternatives to bank loans. Prominent among them is merchant cash advance. Merchant cash advances evoke a feeling of unease when it is mentioned to persons who are unfamiliar with how it operates. But it is for good reason that merchant advance has grown popular with business owners—especially owners of small and medium scale enterprises.
What then is it that makes merchant advance to be a very attractive option when it comes to securing business finance?
The answer, of course, lies in the ease with which it can be obtained as well as other factors that will be examined subsequently.
In the meantime, however, lets us consider a restaurant which is in need of capital for the opening of a new outlet. But considering the cumbersome nature of the process of obtaining bank loans, the firm could easily opt for merchant cash advance. And in most cases, these advances can be acquired within a couple of days. Technically speaking, merchant advances are not loans in the usual sense of the word but are a lump sum given to a company in exchange for its future credit sales.
In other words, the business firm sells its future credit and debit card sales to the lending firm. Usually, the lending firm makes an arrangement with the credit card company of the business for a certain amount which has been agreed upon by both parties to be remitted to it.
This amount is known as the retrievable amount and how it is arrived at depends on the method option which the business subscribes to. Same thing goes for the duration of payment which is a logical outcome of the mode of payment.
How do merchant advance firms make their profit?
It is obvious that merchant advance firms are in business, too. This means they have to have a way of making profits. This is usually achieved by multiplying the cash advance by a certain factor known as the factor rate in order to arrive at the total amount payable by the business franchise. In most cases, the factor is usually less than 1.5 in most natural situations with all things been equal. Moreover, most merchant advance companies will work closely with firm, understand its cash flow and work out a reasonable factor rate which takes into account the peculiarities of the business.
What are the payment options available to businesses?
There are two modes of repaying the merchant cash advance business finance. In the first method, a percentage of the future credit of the business that has been agreed to by both parties is paid at the interval stipulated by the merchant advance firm. By using this method of payment, the time required to complete the payments becomes flexible and is usually adjusted to suit business conditions.
However, if it happens that the actual credit card sales fall short of an expected monthly credit card accrual, even though the retrieval percentage stays the same, the actual cash paid is reduced, and hence the time it will take to complete the payments will increase correspondingly. This is majorly aimed at ensuring that the borrower yet maintains his comfort and keep his business financially fluid.
This, however, should not be seen as a downside of this method as there is no reward, so to speak, for early repayment of the business finance as far as merchant cash advance is concerned.
In the second method, however, a fixed sum of cash is paid at regular intervals until the debt is cleared. This fixed amount is obtained in much the same manner as in the previous but with a slight difference. As in the method of percentage of future credits, this method requires that the agreed percentage is used to compute an actual amount based on the estimated credit or debit card sales of the business.
Unlike the first method, however, this computed amount is paid whether or not the credit card sales exceed the estimate. One good thing about this method is that the exact time when the debt will be cleared off is known from the start. Yet, this mode of payment might tend to put some strain on the cash flow of a business as some have claimed.
On a closer look, both methods are quite the same except that they diverge in a scenario where the estimated credit card sales are much different from what was expected. In any case, both methods work well and it comes down to personal taste and other minor considerations. It is with this in mind that we proceed to examine what it is that makes merchant cash advance so much appealing to persons in need of business finance.
Some Good Things about Merchant Cash Advance Business Finance
The main reason why business owners find seeking business finance from merchant advance firms attractive is that it is so much easy to get a cash advance as compared to conventional bank loans. It usually a matter of days before an advance is approved. And the rate of approval is also extremely high. This happens as a result of the fact the merchant advance firms do not require businesses to have a good credit score before being eligible for an advance. It is also the usual practice for the merchant companies to just look at the sales record of the previous few months before a decision is reached.
To make this more interesting, there is also no requirement for collateral. For it is common knowledge that one of the main reasons a company might fail to secure a business finance is because it is always difficult to provide the kind of collateral commercial banks will always demand.
So there is no risk of a personal loss for the business owners should the business be unable to repay the advance. And is often the case, it is the merchant advance firms that bear the brunt when the business is unable to redeem the advance. Above all, there is no requirement for a good credit score. This is quite significant as most businesses spend a good deal of time trying to improve their credit scores before applying for business finance from commercial banks which are not always forthcoming.
To summarize the pros of merchant cash advance here are the main points: it is extremely fast; it is easy; it requires no collateral, and it doesn’t require a good credit score.
Some not too Good Things about Merchant Cash Advance Business Finance
There are those who consider contracts for merchant advances to be complex. The reason usually put forward is that the contracts are usually loaded with unfamiliar terms which are quite difficult to understand. This is usually not true, at least in the manner in which the argument is made, for with a little effort virtually anyone would understand the core aspects of merchant cash advance transaction.
Still, another objection is raised: merchant cash advances do not have a federal oversight. Although this is true, it is sufficient that the transactions are governed by local business laws within each state. Moreover, one is not to expect the kind of complex legal issues that can arise from commercial bank loans, especially when the business defaults.
Drawing the curtains
Finally, the belief—one which is rather founded on bias—that the ease with which companies obtain small business finance from merchant advance firms could predispose them to borrow often is rather absurd. Being that the advance was required to fulfill a specific business obligation; the question of constant borrowing does not arise since one will not really expect that the conditions for which advance will be required shall always arise.
So are you struggling to raise capital? Try our merchant cash advance options and immediately get funds disposed to you.
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