Merchant lending has had a tremendous impact on the small business lending sector. In the last couple of years, the reliance on commercial banks as a source of small business financing has continued to wane. At the moment, billions of dollars have been spent in assisting small businesses. The number of businesses that have benefited from merchant cash advance is in the thousands. On average 300 thousand dollars’ worth of funding is offered to a small business in need by merchant cash advance providers.
Before this time, only businesses that accepted credit card payments were eligible for merchant lending. But things have changed. Now, small businesses that take automatic clearing house transfers can now benefit from the merchant cash advance industry. The implication of this is that more than 25 million additional businesses can now be eligible for merchant funding as against the 5 million businesses that accept credit card payments. Because of the introduction of automatic clearinghouse to the merchant cash advance business, lenders are no longer restricted to the credit card sales of the business. Rather, the gross sales of the business can now be considered.
A brief description of what merchant cash advance is
Before one begins to consider other aspects of merchant cash advance, it is quite important for one to have a firm grasp of what merchant lending is all about. Merchant lenders are alternative lenders that provide working funds to small and mid-sized companies through a specialized form of factoring. In practice, the merchant vendor purchases receipts that are expected to be generated from the future sales of a business. The borrowing business authorizes its processor to remit a percentage of its future daily credit card sales to the merchant cash advance lender. It is either the agreed amount or percentage is sent directly to the merchant lender or the merchant vendor is authorized to ACH the agreed amount from the checking account of the business in question. This continues on a daily basis until the debt is repaid.
What are some of the things a business should have ready before applying for an advance?
There are certain requirements a business is expected to meet before it can become a beneficiary of merchant lending. And to speed up the underwriting process for the advance, a business ought to have its bank statements for a period of between 3 and six months before the date of application. It is also important for a business to have its tax return for the previous year. Other documents such as the certificate of incorporation, a copy of driver’s license, proof of tenancy, as well as the completed application form alongside with personal information are also required. So merchant lending companies also require a business to have a credit score of 500 and above before it can apply for an advance.
What factors determine how much a business can be issued with?
First things first: the amount which a business can receive by way of an advance is limited by the strength of the merchant lender it decides to approach. In general, most merchant cash advance lenders set the limit at 5 million dollars. That is, of course, the general limit; but the amount that a particular business is eligible for depends on the volume of its sales per month. In most cases, the business is entitled to receive e as much as four times its monthly revenue as an advance. Merchant lending firms do this to ensure that the business only takes an advance which it can repay within a few months.
What Kind of Businesses are best suited for merchant cash advance?
Generally speaking, it is only businesses that have what has been described as a clear path to revenue that should have something to do with merchant lending. However, businesses that have been denied access to loans from traditional sources might also find merchant cash advance to be a good alternative. Reasons a business might be turned down by traditional financing institutions might include lack of credit history occasioned by being a new entrant, poor credit score, lack of collateral and the likes.
A merchant cash advance is also good for a business with an owner FICO score of below 600. No doubt, shops without many hard assets could also benefit from merchant lending. Above all, merchant cash advance is certainly a great choice for industries that carry out a high number of transactions each month. Such industries include restaurants, bars, and retail shops in general. The whole idea is for the business to have a steady flow of customers.
Benefits of Merchant financing
Before a business should ever consider the option of merchant lending is useful to appreciate all of the benefits associated with merchant cash advance since it was relatively more expensive than financing from traditional sources. The first obvious benefit which a business derives from merchant funding is that it is fast. And speed is one of the most important things which businesses consider in obtaining loans. Merchant cash advance is also easy since minimal documentation is all that is required. The result of this is that advances are often available within days. Advances can also be sued for whatever the business decides and are not monitored like bank loans.
On a more serious note, a business does not bear any risk in a merchant lending transaction as merchant loans are unsecured. The merchants are not even under any obligation to repay the advance. Also, a lower credit score requirement means that businesses do not have to worry about improving credit scores before applying for a loan. Nor do they have to worry about their performances being reported to credit bureaus as merchant lenders do not report to credit bureaus. All in all, businesses can have more confidence in merchant vendors that any other lenders because of the high approval rates of merchant loans. Once a business can see these benefits, it would not have to worry much about the cost of merchant lending.