In recent times so much has changed in the small business world. One of those changes has occurred in the area of financing. Before now, small business owners, in particular, have had a hard time securing business funding from mainly traditional sources such as commercial banks. This problem has always been seen as a major one since more than eighty percent of small businesses require one form of funding or the other in order to grow to stay afloat. Commercial banks, on the other hand, have become so reluctant in issuing loans to small businesses, considering being too risky. In fact, it has been observed that the total bank lending to small businesses has plummeted in the last few years.
One study even showed that bank lending to small businesses, in general, has dropped by as much as 68 percent between 2007 and 2010. If not for merchant funding and other alternative sources of business finance, the situation of small business would be very pathetic. At present, it is known that the approval rate of commercial bank loans is very low in that more than 60 percent of loan applications by small business owners end up in rejection.
But, thanks to merchant funding, small businesses that would otherwise not have qualified for bank loans can now have ready access to business funding. These days, small businesses with poor credit or even lack of credit history cannot obtain finance. Finds obtained from merchant cash advance providers can be utilized in various areas in order to promote the growth of the business in general. For example, the funds can be used to provide working capital, meet payroll obligations, purchase inventory, carry out construction and renovation, and also finance equipment.
There are, of course, many reasons why a small business might even want to consider merchant funding as the first choice when it comes to the issue of business finance, instead merely seeing it as an alternative to bank loans. Indeed, many business owners are becoming reluctant to seek out commercial banks for business funding of whatever nature. It has been found that many a business owner does not bother with bank loans as a result of low approval rates and delay. Whatever the reason may be, it is quite clear the businesses are now looking to alternative lenders—particularly merchant finding providers—for their financial needs.
Why are business owners finding merchant cash advance such a great option?
One of the greatest obstacles that business owners face when seeking loans from commercial banks is that of collateral. Yes, the vast majority of small businesses are often unable to provide the required collateral for the loans they seek. In most cases, banks might require collateral in the form of real estate—something which is almost always out of the reach of small businesses.
Sometimes, commercial banks might even insist on personal guarantees in addition to collateral. Offering personal guarantees means that a business owner stands to lose personal assets such as homes and cars if the business is unable to repay the loan. But, in merchant funding, the issues of collateral and personal do not arise. This is because by definition a merchant cash advance is not a loan; rather it is simply a commercial transaction between two businesses where no guarantees can be given. This is to say that the merchant cash vendor bears all the risk and might not be able to make claims against the merchant if the business is unable to repay the loans.
Furthermore, a bank would normally insist on granting loans only to businesses with impressive credit score. There might be good reasons for this since the credit score provides information on how the business has behaved on previous occasions it was indebted. As such, banks based their judgment of the creditworthiness of a business solely on its credit score and financial statement. In the case of merchant funding, however, the decision on whether or not a business is going to get an advance or not is primarily based on its sales record. Once a merchant cash advance provider is satisfied with the performance of a business in terms of credit card sales, issuing an advance is often the next thing.
This does not mean that just about any credit score might do; rather, it means that merchant cash advance vendors require credit score that are very much below those of commercial banks and other traditional lenders. There are, of course, other reasons why businesses are looking to merchant cash advance providers such as speed. For while a bank loan could take weeks or even months to process, merchant funding can be fully processed and delivered in a matter of days. Above all, there is less documentation required in merchant cash advance as compared to bank loans, enabling a smooth and stress-free application process.
How does Merchant cash advance work?
So far, we have looked at some of the ways in which merchant funding is somewhat superior to bank loans. But the question of what it really is has remained unanswered. First thing first: a merchant cash advance is a commercial transaction between a business and a merchant vendor in which the business agrees to sell a portion of its future credit sales to the vendor in exchange for immediate cash. The cash that is provided to the business is often limited to 150 percent of its monthly revenue.
Before the merchant cash advance agreement is signed, both parties usually decide on what the factor and retrieval rates should be. The factor rate is the amount, a little above 1, by which the advance is multiplied to determine the total amount the business is to pay back. For merchant funding, this replaces interest. On the other hand, the retrieval rate is the percentage of the monthly credit sales that is remitted to the merchant cash advance provider to offset the debt. In most cases, the retrieval rate is chosen in such a way that the advance is repaid in less than 18 months as is the norm in the merchant cash advance industry.
At present, the merchant funding is undergoing rapid expansion as small business owners have begun embracing it is a perfect alternative to bank loans. Speed and ease have been the primary factors motivating these business owners to utilize merchant cash advance. And, although, mca funding is more expensive than traditional financing, it has proven time and again to be the answer for businesses in dire need of cash.