If you own a small business or are just starting, then you probably know how challenging it can be to get financing, especially from traditional lenders such as banks. However, there are numerous alternative financing options that can provide your business with greater chances of approval and flexibility. In your quest for a source of funding for your business, you’ve likely come across Merchant Financing along the way.
So, what does Merchant Financing mean? And can Merchant Financing be the quick and affordable solution you need to make investments, cover expenses, and keep your business on track for growth? Since there are some myths and misunderstandings surrounding Merchant Financing, this article covers the concept of Merchant Financing and everything you need to know about this financing solution in order to tell if it makes sense for your business.
But First - What is Merchant Financing?
Also referred to as Merchant Cash Advance, Merchant Financing is basically what the name implies, financing for merchants. It is a type of business financing intended to provide a temporary cash-flow solution to small business owners who may not be eligible for other forms of funding. It really isn’t a loan, but a cash advance in which the payments are made against a business’s future revenues. The lender offers you a lump sum, which is then paid off using a percentage of the credit card sales deposited in your business account. The percentage you pay is known as retrieval rate or “holdback.”
The manner in which a Merchant Cash Advance provider appraises and weighs credit criteria and risk is different from how traditional lenders do. They take a look at the credit card and bank statements to establish if a business can be able to repay the amount in a timely manner. Because it is based on future profits, Merchant Financing is an ideal source of fast capital for struggling and new businesses.
How Merchant Financing Works
Typically, Merchant Financing works more like a short-term business loan. You get a lump sum based on either your credit card sales, or based on your monthly bank statements. When it’s a credit card based Merchant Financing, the lender will put in place a system for intercepting the revenues that borrower’s business takes in through credit card transactions in a manner that allows the lender to take a daily percentage of the total transactions as repayment. This is expected to continue until the Merchant Financing together with the interest if fully paid off. When it’s a fixed Merchant Financing, the small daily or weekly payments are debited from your bank account until your balance is fully paid-in-full. The terms for a Merchant Financing may range from 60 days to 24 months. Repayment commences immediately after the funds are transferred to your company’s account.
The amount you borrow is determined by your average monthly deposits in your bank account, the frequency of the deposits and/or your average credit card sales and your holdback rate – not a set loan term. Normally, the Merchant Financing company will review your statements over the previous 3 or 6 months to determine how large of an advance amount you qualify for.
Generally, there are three methods through which repayments are processed. Credit Card Splits are the one of the most popular method; the payment is automatically split every transaction based on the terms of your Merchant Financing. Credit card splits involve switching to a payment processor that your provider can use but offers the benefit of every party obtaining their share efficiently and quickly.
The other method is ACH Withholding. This stands for Automated Clearing House and basically involves sharing of bank account information with your merchant provider to allow them to withdraw their share manually, based on your contract. Some banks may limit the access upon request if you’re worried about security, but this is rare, given that the Merchant Financing industry is very well established.
The final method you used to make payments is Lockbox. This technique offers you the freedom to use any payment processor at your disposal, but instead of depositing credit card-based revenues into your business bank account, they will direct it to a third-party bank account. First, the lender takes their share from the lockbox account, then the reminder is sent to your company’s bank account. The additional steps slow down payment processing than usual, making this option the least-preferred one.
It’s important to note that any individual financing company may not be able to offer all the three aforementioned options. Also, a client may not qualify for all three payment methods even if they are offered by the lender. Some of these methods may come with additional fees so you may want to do your research before settling on any one of them.
No Collateral is Required for Approval
The main obstacles faced by business owners looking to access bank loans are the need for collateral or personal guarantees. Banks and other traditional lenders treat the issue of collateral as a top priority since it offers them security against the loan issued to the business or company whose capacity to repay can’t always be known for certain. Collateral is also important for lenders who deal with bad credit business owners. The collateral that could be required could be your business's real estate property.
However, unlike conventional loans, Merchant Financing eliminates the need for collateral in a bid to allow more small business owners to have access to business financing. This means that you don’t have to pledge personal and/or business assets in a typical Merchant Cash Advance transaction. Also, you won’t have to be turned away by a lender just because you lack enough equity in your home or business. Most importantly, you don’t have to endure a lengthy collateral valuation process that can take weeks or even months. If you are looking for funding with no collateral required, Merchant Financing is your best option. You don’t have to match up to a lender’s strict and lengthy lending criteria in order to get the cash you need to grow your business.
Merchant Financing Does Not Discriminate Against Bad Credit Business Owner
Most business loans will require a strong personal and business credit score for approval. However, Merchant Financing is more lenient when it comes to considering the borrower’s credit profile. Merchant Cash Advance lenders focus on how long you’ve been in business and how consistent your credit card sales are instead of your past payment history or how much debt you may be carrying. However, it’s important to understand that your credit won’t improve just because you have a Merchant Financing and the repayment is deducted directly from your account. So, you’ll want to take advantage of the lenient nature of Merchant Financing as you work on improving credit score for future financing.
You Can Use the Funding for Any Purpose
Often, small business owners who seek a business loan from conventional lenders must provide detailed information about how they plan to use the funds. Some may even obligate the borrower to utilize the cash for a particular purpose, such as upgrading a facility or buying inventory. If a business owner is found to have deviated from the original plan, they could be deemed to have breached the contract, and the loan could be called in. However, with Merchant Financing, there are no spending rules or limits. Business owners are free to use the funds any way they wish without having to account for how they plan to spend the amount. You can use the funds to take care of temporary shortfalls, pay for advertising campaigns, purchase equipment, implement new technology, or carry out any other tasks necessary for the growth of your business.
Furthermore, Merchant Financing creates room for you to combine it with other forms of business financing solutions provided it’s beneficial to your business. For instance, some business owners get a business line of credit to cover unforeseen, short term expenses. Given that the interest is only charged on the total amount borrowed, it makes strategic sense to have Merchant Financing as a contingency.
The Total Cost of Borrowing Does Not Go Up if You Take Longer to Repay
Technically, Merchant Financing is an advance on future credit card sales. At the end of every business day, a small amount of your daily credit card sales is calculated based on a flat percentage, and the amount is automatically applied against the advance. ACH Merchant Financing works similarly since the cost of the Advance it’s already factor in your daily/weekly payments. One of the main benefits of this approach and an aspect that makes Merchant Cash Advances unique from other business loans is that you won’t be required to pay a higher total cost of borrowing (you don’t pay daily interest) if it takes you longer than agreed to pay off the cash advance. The total borrowing cost remains unchanged and known from the first day, which offers you more control, predictability, as well as stability.
The Application Process is Faster
The speed at which the funding can be approved and granted matters a lot in certain situations. A business can be in dire need of money, requiring a quick source for the needed amount. For instance, a business may need quick funding if it wants to take advantage of a new opening in the market, or when there is an upsurge in product demand, and the business lacks enough funds to upgrade existing equipment or even buy new ones. Typically, in such situations, the most critical consideration for any business seeking external business financing is most likely to be speed.
Moreover, when it comes to fast reviews and approvals, Merchant Financing is second to none. It’s possible for a merchant funding to be delivered to your business within 48 hours of your application. In a complicated case, you might get the cash in as little time as 2 weeks. This is very convenient when compared to conventional loans that could take several take several weeks or even months to be fully processed.
Merchant Financing is a Best Fit for Industries that Often Use Credit Card Payments
As you likely know, some businesses receive a majority of their payments by credit card. Then there are those that don’t accept credit card payments at all. Basically, Merchant Cash Advances are best suited to businesses that frequently use credit cards and need fast access to cash. For example, retailers and restaurants would be appropriate candidates. Startups that have sufficient credit card sales but lack a solid credit history can also take advantage of Merchant Financing. Here are some of the industries that typically use Merchant Cash Advances:
Restaurants can have significant issues when it comes to cash flow. Things such as unexpected equipment failure or even an upsurge in demand can significantly affect how the business is run. Most restaurants accept credit payments as the main form of payment, making Merchant Financing a great fit. Merchant Cash Advances work at the pace of the restaurant’s income earning so they won’t be left in a position where they are remitting an amount they can’t afford. Restaurants can use Merchant Financing in many ways, such as buying a food truck, offering delivery services, opening a catering business, opening another restaurant location, purchasing inventory, paying rent, or meeting payroll.
- Retail Stores
Retail stores can also have their ups and downs when it comes to cash flow. Maybe there’s a slump immediately after the holidays, or there’s a given season that is predominantly busy. Merchant Financing can greatly benefit these companies given that payments can vary depending on the daily revenues. If you are looking to start and run a retail shop, Merchant Financing could help you ensure that your business remains operational. With Merchant Financing, you can comfortably restock items that customers appreciate or higher additional retail employees, especially during your busy season. You decide how you’ll use the money.
- Medical Services
Medical is among the industries that deal with a range of expensive equipment that you can’t afford to work without in case of failure. This is where Merchant Financing comes in handy. The funds can cover such costs and can allow for spending flexibility. When your practice encounters unexpected expenses, merchant loans can be a great source of working capital.
- Beauty Salons
Salon customers mostly pay via credit. So, if you own a salon, you could qualify for Merchant Financing thanks to the volume of credit card payments. With this financing option, you can hire additional technicians, update salon equipment, or pay for marketing materials. Of course, like other businesses in the other industries, you can use the money to help with costs such as payroll, inventory, and rent.
There you have it- what you need to know about Merchant Financing. You can make the best financing decision if you understand the elements of Merchant Financing as described above. If this financing option seems like the right fit for your business, you can start shopping around and apply to your chosen provider and go from there. However, if you decide that it isn’t the right funding source for your business, that’s fine. Merchant Financing may not be ideal for every business but never be afraid to ask and learn more.
At the Wide Merchant Group, we’ll take time to understand your business as well as your need for working capital. We’ll then review your Merchant Cash Advance processing statements to get a feel for the size of your credit card transactions. We can then tailor the financing to fit your business comfortably. With us, you don’t have to worry about hidden fees or unethical practices. Contact us today at 800-630-4214 to learn more about Merchant Financing.