Is Merchant Funding the Easiest Way Out of the Financial Predicament of Your Business
Businesses with poor credit often find it difficult to expand their businesses, make capital improvements or even to build inventory. These are all things most businesses, especially those in the small and medium scale category will have to do on fairly regular basis. But it is also common knowledge that obtaining financial assistance from traditional sources is often impossible for small and medium-sized firms with poor credit. It is this singular factor that makes merchant funding quite relevant as an alternative source of obtaining finance for a business.
What differentiates merchant funding from a loan?
Even though there is some skepticism regarding merchant cash advances, it has proven over time and again to be just what businesses need when the need is quite urgent and a bank loan is not forthcoming. In the actual sense, a merchant fund is not a loan comparable to the one that can be obtained from commercial banks. It is in effect a sale of the future credit sales of the business in exchange of a lump sum of cash. Because a merchant advance is not technically a loan, laws that would normally govern loan transactions with, for instance, commercial bank do not apply; instead, it is treated as a mere commercial transaction and only such laws as the uniform commercial code of each state and the fair credit reporting act are applicable. In addition, laws that govern business to customer relations are not applicable; rather it is the regulations that govern business to business transactions that are applied in a general sense.
To further differentiate between a loan and the cash advance obtained through merchant funding there are other factors to consider. First, they are fixed when dealing with merchant advances, as the repayment requirements are entirely based on the history of the business in question. Since that is the case, the business is not charged any interest; rather, a set fee, which is often referred to as a factor is what the business is charged, and this is what helps to generate profit for the merchant advance firm. In addition, there are no other charges for the product including the usual penalty fees associated with late repayment of loans obtained from commercial banks. Unlike loans that one obtains with loan applications, the documentation required for obtaining merchant funding is quite minimal. For instance, most firms will simply request a bank statement of 3 months or so, a copy of property lease or mortgage statement in addition to a driver’s license. And, of course, the question of daily payments does not arise with bank loans but are integral to a merchant cash advance.
What does merchant funding entail?
Having differentiated between a bank loan and a cash advance, it is necessary to understand what merchant funding as all about. The first thing to know is that a business is usually entitled to cash advance if it has a monthly credit card volume of at least $5000. If this requirement is met and the decision to offer an advance is made by the merchant cash vendor, then in a matter of days the whole transaction shall have been completed. The amount which the business requests for is, as a matter of standard practice, multiplied by a certain factor in order to arrive at the total amount payable by the business. The next thing that occurs is that a certain percentage— often 15 to 25%–of the credit card sales of the business is remitted on a daily basis to the firm. This process continues until the entire amount has been recouped. There are two major options which a business can choose from in order to determine what goes to merchant vendor on a daily basis or at whatever interval both parties have agreed to.
Payment options for merchant funding
The first method which is more commonly adopted is the fixed percentage method. This method requires that a fixed percentage of the credit sale of the business is forwarded to the merchant provider on a daily basis or so. One thing good thing, so to speak, about this method, is that it offers a variable time frame for payment. Consider this: If it had originally been estimated that the business will rake in credit sales of $100000 a month, based on this the merchant funding provider can assume a recovery period of 6 months. If it turns out that the actual credit sales differ markedly from this amount, then the time frame is adjusted either forwards or backward depending on whether sales falls below, or exceed the estimate. In effect, this method means a business pays more in good times and less in bad times
In the second method, however, a fixed fee is paid on a daily basis whether sales are rising or falling down. For the merchant provider, this means a determinable period for the recouping of investment. But this might not be so favorable considering that it would have to pay the same amount both in good times and bad times. Even though the period of payment when this method is adopted is known, there is no benefit to the business if it completes payments at the “right” time since there is no reward for early payments in merchant funding. How the remittal is made to the merchant provider irrespective of what method is used is the next thing to be discussed.
How are payments made to merchant vendors?
The most preferred option of making remittals for most businesses is the split funding, otherwise known as batch splitting. In split funding, the business authorizes its sales processor to remit from the sales the agreed fee or percentage to the merchant provider. It is not all surprising that this split funding is preferred as it is faster, safer, and enables the business to manage its payback activity more effectively.
The other fair popular method requires that a processor debits the credit sales into an escrow account from where the merchant provider makes its own deduction according to the agreed formula. Thereafter, the remainder of the fund is forwarded to the business. As a result of using an escrow account, there is delay—usually 24 hours—before the business gets its portion of the credit sales, not to mention the loss of control which the business suffers.
The last method is that of direct debits. In using direct debit, the merchant provider is empowered to debit its share of the credit sales directly for the business’s own account. As in escrow account, there is less control for there is less control for the business; owing to the automatic clearing house debits –for that is what direct debit implies– the business is sometimes forced to overdraft.
Why it matters which merchant provider you patronize and what to look out for
In spite of the various benefits of using merchant funding such as no requirement for collateral, high approval rate, minimal documentation, non-discrimination based on credit score, no penalties for late payments, it is important to understand that all merchant providers are not the same. There are cases of merchant providers who engage in unwholesome practices which often result in higher payments than that expected. It is for this reason that business owners should be careful in selecting which firm to work with.
One thing to consider is whether or not the merchant funding provider offers flexible payments. In most cases, it is more beneficial for a business to work with a provider that allows for the amount paid to vary in accordance to business conditions; that is providers which would accept the fixed fee method earlier mentioned. It is also very helpful to work with a provider that will not insist of a fixed duration of payment even though it has to collect the remaining funds when the stipulated period elapses—if possible.
Furthermore, finding a provider that has got a good relationship with your processor is necessary since the processor is tied to the process of remitting the payments. It is also advisable to work only with providers who have lived up to expectation in terms of meeting a customer’s expectation of speed (usually less than 15 business days), and efficient approval standards. Most importantly one should only obtain merchant funding from a merchant vendor that has good financial strength since it is quite common to find vendor going out of business every now and then. If a firm has the financial strength it is even possible for it to buy off debts the business might owe as a result of previous unpaid advances in order to prevent the firm from falling into the problem of stacking.
In all, business owners must look for a fair price while remembering at the same time that there are good reasons why merchant funding is costlier than a traditional bank loan: it is unsecured and the provider bears all the risk. Provided the right provider is found the merchant will always come out with the conviction that merchant cash providers exist to ensure the continued survival of small and medium scale business by providing them an alternative source of business funding.
There are many types of chargebacks, and the process can often be frustrating, costly and timely.
This document will help you better understand what a chargeback is, the time frames in which a chargeback can occur, and how to effectively prevent these from impacting your busines
In 2000, in the wake of the dot-com bust, Amazon was forced to sell almost $700 million in convertible bonds to investors abroad. In fact, the company had to offer an extremely interest rate (7%) just to complete the deal. A month after they closed the deal, the...read more
How do I know if I’m paying too much?
Take the fees on your monthly statement and divide them by the total volume that your business processed for the corresponding month. Multiply that number by 100…