Many merchants as the question, “Is a merchant cash advance right for me?”
The response of course is, “Well, that depends.” Let’s look over what a merchant cash advance is.
A merchant cash advance is a true sale. It is not a loan because the private lender is purchasing a commodity that a merchant is selling, his future credit card receivables, for a monetary amount. The investors purchase the future credit card sales at a discounted rate today. The lender makes his return on the investment by collecting a percentage of the credit card receivables over a period of months until that amount is paid back.
Here are five points to consider about this form of business financing:
1) This form of funding is available to many merchants who would not otherwise qualify for a traditional bank loan due to credit, past bankruptcies, or just because of industry type.
2) A merchant cash advance is an unsecured loan. Because it is private lending and not a bank loan, there is no personal or business collateral involved. If the merchant’s business goes under, then the investor simply lost the investment.
3) It is a factoring program – non interest collecting. The merchant and the private lender agree on a set price for the cost of the credit card receivables. Because of this risky form of lending, most lenders tailor their programs between six to nine months (although there are exceptions). The lender predicts what the merchant will be processing in the future based on past statements and will build a program tailored for each merchant’s business. The lender is taking a percentage of future credit card receivables until the advance is paid back, and thus if the merchant is running slow on the predicted payment, then the lender simply gets paid back slower, without interest collecting on the advance. Obviously there are major benefits to this as many merchants and individuals fall behind on credit cards and loans and end up paying enormous amounts of money just in interest.
4) There are no late fees incurred because the lender’s payments are taken automatically from the merchant’s credit card receivables when he batches out of his machine.
5) The merchant cash advance does not affect the credit report. Most lending companies file a UCC against the merchant’s business simply to let other lenders know that they own a percentage of the future credit card sales. If the merchant wants another advance, that lender must be paid off first.
“Yes, but the interest rate is too high.”
Merchant’s must remember that this is not an interest program, but a factoring one. The merchant is paying a fixed amount for the advance. There is no payment schedule, late fees, or interest collecting on the advance. Undoubtedly, a merchant cash advance is more expensive than a traditional bank loan. But if a merchant doesn’t qualify, or isn’t willing to put his personal property or other assets on the line, than a merchant cash advance is a method of business financing to consider.
To learn more about what the process of obtaining a merchant cash advance entails click here!