A merchant cash advance is cash provided upfront on a future credit card transaction. Perhaps one of the main goals of a business person is to see his company grow and thrive. Business people face many challenges, among them are financial setbacks. If not handled well, it could lead to collapse of the business venture.
The market is dynamic and at times, you may have abundant income and at other times, you could have a shortage of capital. If you find yourself in need of cash to purchase essential component, seize a crucial opportunity or make necessary repairs for equipment, then merchant cash advance could be your solution.
How Merchant Cash Advances Work?
A merchant cash advance is give to business people upfront cash that will be debited in their credit transactions. The lender that funds the business with a specified sum of money is in agreement with your business that you pay back the money. It is essential to note that the agreement includes the sum that is given with interest and other fees.
Contrary to other types of loans, you are required to pay cash advance regularly. In essence, you bank will forward a percentage of your daily income to the company giving you the merchant cash advance. The advance is usually based on the volume of sales the business makes and this is used as a measure of how much credit you qualify for.
Merchant loan firms do not usually publish their fees in terms of annual percentages. They use factor rate instead. It is essential to understand that factor rate is a coefficient or a manifold that the credit sale from the borrower is applied to total amount. The amount from the factor rate is the figure that the borrower is required to repay the lender.
High factor rates directly converts to shorter repayment terms and it is recommended for established businesses that make huge daily sales. On the other hand, a lower factor rate leads to a longer repayment term and this could be applicable to small businesses with low daily turnover.
There are various reasons why you should opt for a merchant cash advance. These include new businesses which do not qualify for conventional loans, inadequate assets, seeking for a short-term financing or you need flexible repayment terms. You should look for a reputable company to provide the cash advance service.
How to Qualify For Merchant Loans
The beauty of cash merchant loans is that most businesses qualify for one. The merchant does not require a down payment or collateral for them to offer you loans. Criteria used in offering loans include:
Demonstrating ability to pay
Most firms considering whether to grant cash advances do not look at profitability of the business. As long as you can generate sales, that can warrant a loan. Or if you are able to cover monthly payments, then you will automatically get the loan.
Other Minimum Requirements
While merchant cash advance can be given to small businesses, it is imperative to note that the business seeking the loan must meet the minimum standard. The requirements included monthly revenues, how long you’ve been in the business and debit or credit card sales.
How to Obtain Merchant Cash Advance
Applying for a merchant cash advance is simple. Usually, the firms obtain cash within days of application. The steps that you should follow include:
Arrange For Collection from a Certified Credit Card Processor
Merchant cash advance creditworthiness is determined by the lender’s perception of the borrower. In this context, the lender will look at the ability and intent of the borrower to repay on time. You are required to have a checking account with the processor who lends you the money. If you are working with an approved firm, which is contracted by your funding provider, then you can go on to the next step of application.
Submit a Duly Filled Application Form
Unlike other conventional or traditional bank loans, merchant cash for business application process is simple. You will be required to provide information about your business, its average credit sales, income generated and how long you’ve been operating the business.
The baseline for you to qualify for the loan varies from one firm to another. While in most cases, you may not fund a startup using merchant cash advance. However, after a few months of operation and with average credit sales shown on your card, you may qualify for a merchant cash advance.
Read the Contract Carefully Before Signing
This is the most important step in the application process. Merchant loans are not similar to traditional lending and it is not subject to strict regulations. Before you sign, ensure that you have read and understood the contract properly.
You should know that you are selling your future credit card receipts in exchange for cash today. You are subject to penalties if you default the loan and you agree to provide a specific amount of your daily credit card sales to repay the loan.
Merchant cash advance comes with some fine print, complicated terms and conditions that challenges even the most knowledgeable individuals. As a business owner, you should due time to understand the rules and regulations of different loan companies before you sign agreement documents.
Once your business information is submitted to the lender, they will process it and give you the loan. The loan is usually deposited into your bank account to serve as working capital and expand or to improve your business.
Methods of Repaying Merchant Cash Advances
There are three options that you can use to repay your loan. These include split withholding, trust account holding and ACH holding. Split withholding is where the cash advance payments are deducted automatically from your merchant account and transferred to the lender.
Trust account withholding is where all the credit card sales are deposited into a bank account that is controlled by a finance company, which will then transfer the funds back into the business account after the deduction is made. ACH withholding is a repayment plan where automatic debit is done on your checking account.
There are two repayment structures for merchant cash advances. Loan structure and sales structure are the two repayments structures that you can use to repay your merchant cash advance. In the sales structure, there is a predetermined percentage of the sales calculated from your monthly revenue.
When sales fluctuate, so can your repayment amount. For loan structure, this is a type of agreement where you pay daily or weekly depending on your monthly revenue estimate. However, it is imperative to understand that repayment is the same throughout payment period and it does not fluctuate with sales.
The longevity of the repayment period usually depends on monthly sales. However, most merchant cash advances are paid up within 3-12 months. If you choose to pay back the loan as a percentage of the sales, then you are unable to determine the exact timeframe because of fluctuating sales. Economic experts recommended that you repay the merchant cash advance as quickly as possible.
Benefits of Merchant Cash Advance
a. Quick Turnaround
If you need an immediate cash loan for your business and you do not want to deal with a lot of paperwork, then merchant loan could be your best option. With merchant cash advances, you just have to submit report and the company will process the information and dispense the merchant cash advance quickly.
b. No Collateral
Merchant loans are unsecured and are not tied to any assets. It is based on your monthly sales and the percentage agreed with the lender. It is essential that you read all the terms and conditions before you sign the loan agreement.
c. Payments Are Directly Proportionate To Sales Volume
Generally, the repayments you make to the lending company correspond to amount of sales made during the week or month. Companies can adjust the repayment amount in accordance to sales volume.
d. Credit Check is not Required Most of the Time
This is a huge advantage for many lenders. Merchant cash advance provide a lump sum of money in exchange for future sales and credit rating of the prospective borrower is usually not taken into account.