The word business encompasses a lot of terms, to individuals, a business is the act of buying and selling, well they are right to some extent, but what business entails is beyond just buying and selling, it requires the act of striving with the business to see it stand feet. To achieve this, they are a lot of things the owner is going to encounter and trying to solve these problems will definitely unravel out things that at the beginning, they aren’t aware. Irrespective of having business in a different scale, business entirely is broad and this is the reason while it is advised to learn about the business before venturing into one, rather than learning when in the business from costly errors or decision because you aren’t acquainted with the solution. The latter will cause depression and one might consider quitting. The step to achieving good business feet is first having that bright idea and ways to enhance this idea to yield maximum profits. After this is done, the next is a source of financing, well this depends on the wealth of the business owner. If the startup capital is not available, there are a lot of ways of getting funds, from loans to merchant cash advance to crowdfunding etc. once the funds are ready, next is to diversify it to every section of the mapped out business plan. In this article we will be dealing on getting loans from merchant cash advance, what are its pros and cons of it etc.
What is Merchant Cash Advance
A merchant cash advance is advances offered against future sales. This type of financing is generally available to businesses that have a steady volume of credit card sales, including medical offices, restaurants and retail stores. Technically speaking, a merchant cash advance should not be considered a loan. This is because with loans, the lender lends you money and you make regular repayments on the principal, along with interest. But with merchant cash advances, the lender provides you with cash beforehand (upfront). Then, the lender will automatically deduct a predetermined percentage of your daily debit and credit card sales, along with an additional fee (if agreed from onset). Some Merchant Cash Advance lenders also accept cash by using the Automated Clearing House (ACH) to make regular withdrawals from your bank account. The lender will continue taking a cut from your sales until the entire advance they provided you have been repaid in full.
Merchant cash advance providers evaluate risk and weight credit criteria differently than a banker. A Merchant cash advance provider will look at the daily credit card receipts to determine if the business can pay back the funds in the purported time stated. In a nutshell, the whole thing means a small business is virtually selling a portion of future credit card sales to acquire capital immediately.
How a Merchant Cash Advance Works
The first step is the agreement between the small business owner and the Merchant cash advance provider regarding the advance amount, holdback, payback amount and term of the advance. Once the agreement is made, the advance is then transferred to the business’ owner bank account in exchange for a future percentage of credit card receipts from the business which could be daily, weekly or monthly.
When an agreed percentage of the daily credit card receipts are withheld, for the purpose of paying back the Merchant Cash Advance loan, this is called a “holdback” and the process will continue until the advance is paid in full. The access to the business owner’s merchant account eliminates the collateral requirement required for a traditional small business loan (like a bank).
Since repayment is based upon a percentage of the daily balance in the merchants’ account, this means that the more credit card transactions a business does, the faster they’re able to repay the advance. And, if transactions are lower on any given day, the draw from the merchant account will be less. This means that the business’ payback is relative to their daily incoming cash flow.
What are the benefits of merchant cash advances?
Flexible and scalable finance
Since repayments are made as a percentage of revenue, then the up and down your business’s income has a role to play in payment. What this means is that when things are going well, you tend to pay more back each month, but if the business is going through a tough period, you’ll pay a smaller amount. It is a good payment style for many companies unlike fixed payment finance because in this, you can have more reassurance that you’ll be able to make payments even when passing through the toughest time in the business.
This is another benefit of merchant cash advances loans, this due to the repayments being relatively painless. This is because the lender works directly with the card terminal provider and not a business bank account. Thus the percentage they take for repayments is never in your business’s bank account, but instead, it is taken from somewhere else. This is similar to the way that most people pay their income tax.
Well, unlike other types of finance, the payback money is taken automatically until the debt is paid, so it’s just like a ‘hands-off’ setup from the business owner. That gives them time running their business rather than worrying about finances.
Frees up other forms of finance
The last benefit of a merchant cash advance is that it simultaneously opens a new line of credit. What this means is that it’s possible to get another type of finance for your business at the same time as a merchant cash advance, which seems to be useful for lots of businesses. For example, if you already have an equipment lease, it’s still possible to get a merchant cash advance for more general cashflow almost at the same time.
What are the downsides?
Merchant cash advances have lots of benefits, but at the same time, there are minor drawbacks to consider. The most being that the amount you can borrow depends on your turnover. For example, if you want to borrow £6,000, but your business makes £1,000 or less per month, you will likely not be able to secure that level of lending because it is not in line with your cashflow position.
How To Start A Merchant Cash Advance Business
The time it takes to get approved for a merchant cash advance depends on the paperwork and other details, it could be anywhere from hours to a few days. After the whole process is approved, the business owner could see the funds in their account within two days. The application process is not as complicated as other business loan types, which typically makes the merchant cash advance approval process a faster option. Below are the steps a business owner needs to take:
- Apply for funding
- Provide documentation
- Get approved
- Set up the credit card processing
- Finalise the details
- Receive the funds
These are the process to be followed to get a merchant business advance loan and get the business started. The whole process is very easy, but the rates for a merchant cash advance can be much higher than other types of financing, and the rates vary widely by provider. Thus it is very pertinent to make sure the ROI is positive before you sign on the document.