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Merchant financing is used by small business owners to cover operating expenses or make necessary purchases when cash flow is not sufficient to meet the needs of the business. This type of financing is popular with business owners whose revenue cycles are seasonally dependent, are in the process of implementing growth strategies, or any other business where income is collected through credit card or debit card sales. In this article, we explore the financing options through merchant financing as well as provide tips on choosing the best merchant loan company for your business needs.
What is Merchant Loan Company?
merchant financing programs, such as merchant cash advance (MCA), is a type of business financing where the business owner receives a lump sum of money and the merchant loan company is repaid by collecting a predetermined percentage of daily credit card payments from the business. These types of commercial agreements do not have fixed repayment terms as payments are based on future sales.
How does a merchant cash advance work
The funding between a merchant loan company and an entrepreneur is not actually a loan, but a financing agreement. Merchant cash advances are often offered through alternative lenders, or online lenders, as well as companies dedicated to providing merchant cash advances. The process works similarly to other types of small business loan options and begins with an application.
- Application Process Any small business owner can apply for a merchant cash advance. The amount provided by the company in advance depends on the sales history, industry and business plan of the business. usually, business credit history OR Personal credit score is not taken into account during the approval process for a merchant cash advance.
- Grant Once the application is complete, approved entrepreneurs can expect to receive funds from the merchant account into their business bank account within 24 to 72 hours.
- repayment agreement Merchant loan providers who approve financing will establish a process for collecting their percentage of the business’s credit card transactions. The arrangement usually involves daily or weekly withdrawals. The time it takes to pay off the MCA in full depends on the amount of the advance, the frequency of installments and the provider’s fees.
How To Qualify For A Merchant Cash Advance
While credit score is not considered a primary factor for approval, some merchant financing companies will take new business owners or other borrowers with a good credit rating who have limited sales history. However, since these financing arrangements are not like traditional bank loans, the eligibility requirements are simpler. An intending business owner will typically be asked to provide the following documents To the Lender:
- credit card processing statement
- Identification – Driving license, or passport
- canceled business check
- bank details
- federal income tax return
Applicants who have been in business for at least 18 months and generate a minimum of $150,000 in annual revenue are generally approved faster by financing companies.
How much does MCA cost?
Merchant cash advances are a more expensive financing option than some small business loans or other sources of business funding. The financing cost of MCA is calculated using factor rates. The factor rate assigns a decimal value that is multiplied by the amount of money provided to the business to determine the total cost of the agreement. For example, if a business owner borrows $5,000 from a merchant loan company with a factor rate of 1.12, the business would need to repay the provider a total of $5,600.
How to Find the Best Merchant Loan Company
If a merchant cash advance sounds like it might be the right decision for your business needs, you may be wondering how to get started.
Tips for Comparing Loan Companies
when choosing a merchant credit company When it comes to working with, do your research ahead of time to make sure the company has a reputation for providing proper service to its customers. A provider that has a history of being transparent about repayment periods and agreement costs will be your best bet.
- do an online search – Performing a simple internet search is a great way to get an overview of the different companies. Ultimately, you want to do business with a company that has a significant online presence and whose website has been registered for at least 6 months. There are also many websites that provide regular reviews on financial services. For example, while searching for “best merchant loan companies” you may come across Article by Funding Hero that name Biz2Credit As a 2022 Editor’s Choice for merchant cash advances.
- Check with the Better Business Bureau – Once you’ve narrowed down your search, additional reassurance can be gained by checking better business bureau (BBB) website. The site ranks businesses by assigning a grade to each company. The grading scale ranges from A+ to F, with a rating of AC being considered a good business to work for. In addition to grades, the website lists reasons for ratings and provides customer reviews for most businesses.
- trust your instincts – Don’t be afraid to approach merchant cash advance companies. Speaking with a representative of the lender can indicate whether they provide transparency and good customer service. Did the lender return your emails or calls in a timely manner? Was the lender clear about its factor rates and origination fees? Was the representative able to get all of your questions answered?
Pros and Cons of Using a Merchant Loan
Making an exit decision not unlike other business financing decisions merchant cash advance Big decision. Before you decide to sign any financial agreement, make sure you consider the pros and cons of an MCA.
Merchant Cash Advance: Benefits
- fast funding Merchant Cash Advance is one of the fastest types of business financing in the market. Borrowers can typically receive their lump sum advance payment in 1-3 business days, which is weeks faster than other types of loans, such as sba loan,
- less documentation Borrowers often find themselves inundated with document requests when working with banks or credit unions on long-term financing and other loan options. MCAs require less paperwork than traditional loans because the credit decision is based mostly on the sales record of the business applying.
- bad credit ok Merchant loans to companies are repaid directly from the company’s credit card sales. Any type of business, especially retail and restaurant locations, that has partnered with a credit card processing company can accept credit cards and debit cards. For these reasons, small business owners with poor credit may still qualify for an MCA if their sales history is satisfactory.
- Payment fluctuates with business – Since repayment is based on a percentage of card sales, the loan payment required on an advance is lower when business is slow. When business is doing well again, and revenue has increased, the higher down payment will help you pay off the loan faster. Some MCA agreements are set up to deduct periodic, fixed ACH payments from the business. In those cases, borrowers can request a lower down payment when actual business receivables are less than expected.
Merchant Cash Advance: Cons
- financing cost – MCA can be costly for small business owners and startup entrepreneurs. Since this arrangement is not a real loan, there is no fixed repayment schedule. it’s challenging to compare factor rates for interest rates and annual percentage rate, but the factor rate typically results in a much higher total financing cost than loan options or business credit cards.
- payment based on sales While borrowers benefit from lower payments when sales are low, the flip side of percentage-based payments means that payments go up when sales are high. Since many business owners depend on the busy season to reinvest in their businesses, higher payments can be a disadvantage when budgeting for marketing expenses or large purchases and repairs.
- no prepayment benefit – Since MCA borrowers agree to repay the merchant loan company with a fixed amount as a percentage of sales, there is no cost savings for borrowers who repay the loan early. While some traditional loan agreements include a prepayment penalty, they usually offer savings by requiring lower interest if you repay early.
- complex contract Eligibility and document requirements are simpler than other funding options, but MCA contracts can still be complicated for small business owners. Since repayment is typically structured as a percentage of the business’s future receivables over a specified time period and a fixed repayment amount over that time period, it can be difficult to understand what borrowers need. Hence, it is important to work with a lender you trust while taking out an MCA.
Other Small Business Financing Options to Consider
If you are concerned about the financing costs associated with a merchant cash advance, you may be interested in learning about other financing options for small businesses. Each of the following loan types can be secured through a traditional bank or online lender, such as Biz2Credit,
line of credit
a business line of credit Revolving credit is a type of credit that works like a business credit card, where the borrower is approved for a maximum credit line. The business owner can then withdraw funds any time credit is available. When the credit line is paid off, the money becomes available again. Lines of credit can be secured in low credit score cases where the borrower is required to pledge assets, such as commercial real estate as collateral or provide a personal guarantee. However, borrowers with low credit scores have to pay higher interest rates.
sba loan program There are financing options for small business owners where a portion of the borrowed amount is backed by US Small Business Administration, SBA loans offer lower interest rates and require lower down payments than MCA providers and traditional bank loans, and eligibility is based on a number of factors including loan amount, credit score and time in business. The SBA offers several different loan programs, including SBA 7(a) loans, SBA microloans, and SBA Express loans. SBA loans are available through both alternative lenders, such as Biz2Creditand traditional financial institutions, such as national banks.
Short Term Loans
Term loan A traditional type of loan where an approved borrower receives a lump sum payment upfront and repays the loan with monthly payments of principal and interest. Term loans whose repayment terms are less than 36 months are considered short term and are sanctioned based on the creditworthiness of the borrower. Short-term loans are best for entrepreneurs looking to purchase inventory or meet a working capital shortfall. Long-term loans are an option for small business owners looking to make a large purchase, such as equipment or real estate, that would benefit from extended time to repay the loan.
Merchant cash advances can be a great financing tool for small business owners like this one. digital solutions developer, who were able to obtain a $40,000 cash advance while working with the right financing company. They differ from a conventional loan because there are no fixed repayment terms and the financing cost is calculated using a factor rate instead of interest rates. Merchant cash advances work well for borrowers with poor credit scores who need money fast, but the financing cost for MCAs can be high compared to other loan options. Even If Cash Advances Aren’t For You, Investigate Other Loan Options Biz2Credit Like term loan or business line of credit.