Financing for Merchants: Everything You Need to Know

funding for merchants

If you are starting a new business, you will need to find proper capital and financing at some point in the future to keep your operations moving forward. A steady flow of cash helps to maintain a robust financial backup while keeping the business running smoothly.

While hunting for sources for funding your business, it is highly likely that you must have heard of funding for merchants many times. However, what is it exactly? Funding for merchants is a term that refers to any business funding that any business with a merchant storefront can fund with. A merchant storefront typically requires a credit card processing system.

Funding for merchants (or merchant financing) is often used to refer to merchant cash advances; additionally, the term as also apply to any funding type that collects repayments automatically through your credit card processing system. It is not precisely a loan, but more like a cash advance. Instead of writing checks to the lender on a daily or monthly basis, the agreed percentage of payment is automatically deducted from your daily or monthly sales.

How does funding for merchants work?

Any funding for merchant lender will set up a system for intercepting the money your business gets through credit card transactions. One through the system, the lender will take an agreed percentage of the operation as repayment. This goes on till the merchant financing (or funding for the merchant), and interest is paid off.

This form of repayment also depends on how well your business is doing. On good business days, you will pay more towards your financing; on bad days, you will be paying less. On holidays, when your card transaction displays zero, you don’t have to pay anything at all.

Since there is no way to know how long it will take to pay off the merchant financing, its cost is not expressed in the same APR like other business funding. Instead, funding for merchant carries factor rates. Factor rates are values in decimals, and it reveals how much your merchant financing will overall cost. For example, if you secure funding for a merchant of $1,000 at a 1.15-factor rate, you will have to pay your lender $1150 (by multiplying 1000 with 1.15). It may look like factor rates on funding for the merchant is daunting, but it is the simplest method to see how much business funding will cost you ultimately.

What terms can funding for merchants provide

  1.    Merchant financing loan amounts

Financing for merchants can range anywhere between $2,500 and $250,000. However, you can also reach past this general range. If you are willing to pay extremely high rates, you can look for merchant funding for as much as you need. However, if you are looking for a large loan amount, it would be a good idea to find a lower rate and longer-term funding sources.

  1.    Rates of merchant financing

As mentioned before, merchant financing rates are not expressed in APR or interest rates because it does not come with a predetermined term length. Instead, it will come with a factor rate that will tell you how much your loan will end up costing you, no matter how long it takes you to repay back.  Mostly, the factor rate ranges between 1.14 and 1.18. However, there is much funding for merchant lenders with much higher factor rates.

What do you need to securely get a merchant fund?

  •    Credit Card Processing Statements
  •    Business Tax Returns
  •    Credit Score
  •    Bank Statements
  •    Voided Business Check
  •    Driver’s License
  •    At least $50,000 in annual revenue
  •    At least 1 year in business
  •    A personal credit score of at least 500

Benefits of merchant funding

   Easy qualification

One of the best benefits of funding for merchants is the easy qualification requirements. This is a pretty accessible funding option. In most cases, funding for merchants lenders will not even consider your business’s credit history. This is because the repayment will automatically be deducted from your credit card’s processing system; hence, most lenders would only want to see that you are performing a high amount of credit card transactions.

   Automatic repayment

You will never have to worry about having an automatic payment bounce or missing a payment. You won’t even need to touch the revenues of your credit card because your lender will intercept it before it reaches your account. As such, you will not have to worry about rejected payment fees or late fees as well. Also, the automatic repayment structure allows you to repay the loan at your own pace. This means you can pay more when business is good and pay less when the business is going bad.

   The total cost of capital is low

As a short-term form of financing, funding for merchants have a distinct advantage – the low cost of capital. Since you are making payments daily for your merchant financing, it is highly likely that you will pay it off in a short span of time. Lenders are also aware of this fact, hence they do not charge large amounts of interest since your loan will reach maturity in less than a year in most cases.

On the other hand, longer-term financing will have less frequent payments and will take much more time to reach maturity. Hence, long-term loans gather more interest and will end up costing you more in the long run.

Bottom line

It is very important that you research all types of business funding before choosing one. If you are ready for financing merchants finance, the next logical step would be to apply to a merchant finance provider of your choosing and go forward from there.

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