Growth and expansion form part of the overall objectives of all businesses whether big or small. And for about 80 percent of small businesses, obtaining financing is about the only way they can meet up with the demand for growth and expansion. Because businesses might often need to tap into businesses opportunities that could arise suddenly, there is a need for fast loans to be within reach of small businesses in particular. And it is alternative lenders in general and merchant cash advance providers in particular that have risen to the challenge of making funding available to small business owners.
The current state of the merchant cash advance industry
The merchant cash advance industry at present is experiencing much growth that exceeds anything one could have imagined before now. From a handful of merchant lenders just a few decades ago, there are now thousands of merchant cash advance lenders in the entire country providing fast loans to businesses that might otherwise not have access to funding from traditional sources. The success of top merchant companies has inspired such huge firms as PayPal to venture into the alternative lending business.
What are merchant loans and why does processing them not take much time?
In spite of the popularity of merchant cash advance, it appears that there is still some confusion concerning it. In simple terms, therefore, a merchant cash advance is a lump sum of cash which a business receives from a merchant lender in exchange for a portion of its future receivables. Merchant cash advance agreements are structured in such a manner that a business has to make daily payments to the merchant lender until the fast loans have been repaid.
The time it takes to process a merchant cash advance is significantly shorter than what might obtain with traditional financial institutions. This should not come as a surprise considering that merchant lenders do not follow the usual loan underwriting process of, say, commercial banks. Because the decision of whether or not a particular business is to be issued with an advance is based on the volume of credit card sales it generates, it is quite easy for lenders to reach a decision. All that is required is the financial statement of the business for some months to show that it is capable of repaying the loan. It has therefore been the case that businesses in need of fast loans look in the direction of merchant vendors.
What are the basic requirements for obtaining a merchant cash advance?
Not all businesses are eligible for a cash advance. The foremost requirement for a business to be considered eligible for an advance is that it must accept credit card payments. A business is also expected to have a physical location as online businesses are excluded from obtaining fast loans from merchant lenders. Although these are the minimum general requirements, individual lenders also have requirements which a business has to meet.
For instance, some lenders require businesses to have been in operation for at least one year while others accept six months. Regardless of the lender in question, the requirements for a merchant cash advance are not as stringent as those of commercial banks. This is exactly why small businesses find the option of fast merchant loans so attractive.
Basic process involved in merchant cash advance transactions
Before merchant cash advance agreement is entered into by a business, there are certain aspects of the transaction that has to be agreed on. One such thing is the factor rate that determines how much the business is expected to pay back. Depending on this factor rate, the business might pay back somewhere between 110 t0 150 percent of the actual advance. Then, there is the holdback percentage that determines how much of the daily credit sales are remitted to merchant lenders in a bid to offset fast merchant loans that have been obtained. As soon as an agreement has been reached on these two essential components of an MCA transaction, the contract is usually signed.
How flexible is the payment of a merchant of cash advance?
The repayment of fast loans obtained through merchant cash advance is often flexible, allowing the borrowing business to choose what mode of payment it finds convenient. Businesses often have a choice between a fixed percentage and fixed amount methods of payment. The method of fixed percentage is often referred as it affords the business to pay according to how much sales it is making. The main benefit of this is that cash flow is not strained. On the other hand, however, the fixed amount method ensures that the advance is paid off quickly, although there is no benefit for quick payments.
Reasons small businesses are drawn to merchant cash advance
That the merchant cash advance industry is expanding rapidly is a testimony to the fact small businesses are finding it useful to their growth and expansion. Because businesses can now obtain fasts loans without the usual obstacles of having to provide collateral and personal guarantees, the number of businesses that now have access to funding has tremendously increased. Businesses also do no longer have to wait for weeks or months to obtain funds required to harness a particular business opportunity that has suddenly surfaced.
With the emergence of fast merchant loans, small business owners are assured of financing as the credit score requirement for merchant loans is significantly lower than those of commercial banks. There is no doubt that the reduction of credit score requirement to around 500 will make a huge difference to small businesses with rather poor credit scores. That’s not all.
Merchant cash advance lenders have also removed the uncertainty associated with obtaining loans in general. Chances of receiving loans from traditional sources for small businesses are typically less than 50 percent than that of merchant lenders which exceeds 90 percent. It means that any business in dire need of funds can look to merchant lenders and not be disappointed. In all, one might not be wrong to conclude that merchant lenders have lived up to expectation in becoming a perfect alternative to commercial bank loans.