How Does Merchant Financing Work?
A Merchant Cash Advance (MCA) or Merchant Financing is a type of financing where the lender agrees to buy a portion of a merchant’s future receivables in exchange for a fixed fee, which is then paid back in the form of small daily, or weekly installments. While the majority of merchant financing products today are paid back in fixed daily payables via ACH, in some cases, the merchant may pay a predetermined percentage of their credit card sales to the lender.
Generally, you must have operated the business for a minimum of five months and earning a minimum of $60,000 in revenue per year to qualify for merchant financing. An area where merchant financing shines over a more traditional business loan is their ability to approve merchants with a less than ideal credit score. Typically, merchant financing can be renewed when they’re half-way paid off, meaning that your business may access additional capital in times when sales are low.
Why do You Need Merchant Financing?
Businesses require capital at one point or another, and this can be for a variety of reasons. Some people will offer cautionary anecdotes about getting a loan for your startup while others will urge you to apply for financing. After evaluating your options, you may settle for a merchant cash advance to fulfill the following purposes:
- Expand the Business
As the business grows, you will need extra funding to keep things afloat and expand the current location. Perhaps the rents on adjacent premises are affordable, and you wish to extend your restaurant so you can host more customers. You could also be seeking to break new ground and take advantage of a promising location before your competitor does.
Even when business is right, you will need to inject more capital to pay the up-front costs and a myriad of unforeseen expenses. Before applying for a merchant cash advance, do a thorough analysis of your projected revenue to see if you can repay the Advance with ease. Experienced people will tell you that expanding a business doesn't mean profits will come right away. It may take a while before you realize any substantial returns, especially new ventures.
- Buy Inventory
Running a business comes with many costs, and inventory is one of the most significant expenses. You must keep raw materials and other necessities at desirable levels to avoid running out of ingredients or tools to create the outputs you sell. When the market is too expensive, stocking up becomes a challenge, and the extra costs are pushed on to customers.
If you are running an eatery, spiking the food prices may put off customers, and they find somewhere else to dine. Failure to adjust costs may trigger loses, and your businesses will struggle to stay afloat. Buying things in bulk helps you earn significant discounts that translate to huge savings down the line. A merchant cash advance will cater for these expenses so you can buy inventory when the market prices are low.
- Recruit New Talent
Growing your business goes hand-in-hand with finding the best talent you can afford. You may have made do with a few talented people performing different roles and still managing, but you now want specialized expertise. If you are running a restaurant catering to business executives on that street, you want to impress them with amazing cuisines. Happy customers will keep flocking to your premises at lunch hour.
This goal requires hiring a qualified chef, and this talent does not come cheap – especially if you poach from a competitor. Engaging extra drivers, servers, cleaning crew, etc. requires an injection of capital so you can make payroll without struggling. Recruitment is time-consuming and expensive, and you must continue investing in this new talent by training them for their respective roles. Most business owners believe that proper talent management practices spur innovation and keep them ahead of the curve.
- Buy Equipment
You may wish to get new machinery to help run operations smoothly or upgrade the old equipment, so they are up to the latest technology standards. It could be a top-of-the-range espresso machine, IT equipment, a new grill, or other appliances that are essential to your business. Acquiring these assets is capital intensive, and you need financing to avoid draining the company's resources.
Applying for asset funding helps you purchase the necessary equipment paying in installments over many months. In a cutthroat business environment, making the right decisions can make a world of difference in profitability. Do not postpone that software upgrade any longer; consider taking a merchant cash advance and devise an agreeable payment strategy.
- You Have Low or Poor Credit History
Having a low credit history is often cited as one of the main reasons why the small business owner can’t secure a traditional SBA loan. While most MCAs will look at your credit, and will make underwriting decisions based on it, they often are substantially more flexible than traditional banks in approving files with less than ideal credit reports. While MCA lenders usually do not report your payments to the credit bureaus, MCAs may be an ideal source of financing for your business while your credit score improve.
- It May Reduce Debt
Nowadays, there are many alternative financing options available to the small business owner. Some MCA lenders offer a form of reverse consolidation which may be a viable option for the small business owner that seeks to reduce their debt. If you have existing liabilities from other merchant financing lenders, a new line of financing can help consolidate these outstanding debts to help you manage finances better. This step will free up funds so they can be directed in more critical areas such as funding growth so your startup can move to the next level. Your small enterprise now and in the long run.
Whatever the reason for the loan, you must factor in all costs and see if the investment will increase your bottom line. In the end, you want to be confident that you can repay whatever amount you borrow. Otherwise, this new influx of capital does not yield harm to your business.
Why Do Business Owners Prefer Merchant Financing?
After evaluating different financing options, you may determine that merchant financing is the way to go for your business. This financing method is often convenient when you need capital right away without having to go through the bank lengthy lending process. These bank processes can sometimes take several weeks, and when time is of the essence, your business cannot afford to wait. This speedy access helps you save the business from a precarious situation such as on the blink of not meeting payroll or being sued by vendors. It prevents things from crumbling in tough economic times when revenues are dwindling by the day, and turning a profit is hard to come by.
When to Take Merchant Financing
Startups and established businesses need capital to keep them growing in an evolving consumer market. You may wish to depart from old methods or product lines and try something new, or you want to recruit more talent. Merchant financing is the right approach for your company for the following reasons:
- You Run a Seasonal Business
Local hotels, restaurants, recreational centers, and other businesses located in tourist areas have high and low peak seasons. Such enterprises are flourishing in the summer when domestic and international visitors flock the coast to sunbathe and play beach volleyball. However, things cool down when winter comes, and you are left barely making decent sales.
Other businesses such as those located in ski resorts are booming in the winter and doing not so great in additional months. Seasonal companies could do with merchant financing as they can help you prepare financially to help them survive slower months.
- Quick Access to Capital
Merchant Financing is an ideal choice because you can apply for them online and have the money deposited into the business account within days, sometimes within 24-48 hours. This fast turnaround is highly desired to rescue businesses that could be in trouble, such as being low in inventory or repairing vital machinery. A quick influx of cash helps you solve these emergencies before things escalate and hurt your business.
- Easy to Repay
Companies that get the most revenue from debit and credit card transactions like an online retailer for apparel will find MCA sensible. You don't have to worry about defaulting on the loan as we recoup the money from your daily transaction volumes. The repayments are made automatically. What's more, you can leverage this initial loan to apply for more substantial financing when you need to undertake more projects.
- No Collateral Requirement
MCA lenders will rarely demand collateral, and this makes them attractive to business owners who don't have any guarantee. Businesspersons who don't wish to submit one for preservation purposes also prefer this capital option. Therefore, you don't have to use your primary residence as collateral just in case things go awry. You could also be preserving company assets like a fleet of delivery trucks, so you don't risk losing essential assets. Without the additional risk of losing property, you can borrow and repay as often as needed.
- Credit Rating
Merchant Financing is often not reported to credit agencies, so they have no impact on your credit history if you miss a payment. Therefore, you can leverage your credit rating for other financial needs, such as applying for a mortgage. If you are seeking a quick and easy solution that doesn't impact your life too much, call Wide Merchant Group to speak to a representative.
- Quick Repayment
Taking out a business loan can be daunting when you consider the economic uncertainties that can influence how well you perform. MCAs are emergency financing that can be repaid inside a year or more. You get to solve an immediate need without having to worry about accumulating interests over several months, as merchant financing often has a fixed cost that doesn’t fluctuate.
Disadvantages of Merchant Cash Advances
The above benefits of MCA; notwithstanding, this line of financing comes with a few downsides that deter many entrepreneurs from seeking this capital. They include:
- They can be Expensive – because Merchant Financing are unsecured, and don’t require a perfect credit and/or collateral to secure the debt, they often use a factor rate that is sometimes more expensive than using an ARP.
- Cash flow problems - allowing the lender to take a more significant percentage of your daily sales for faster repayment may affect your business. You have other financial obligations such as meeting payroll and having someone take a massive chunk of regular sales makes it harder to meet these commitments. If you cannot pay employees, their productivity will go down, and attrition ensues.
- No credit improvement – because most merchant financing firms do not report to the credit bureaus, making recurring payments does not improve your credit score.
Find a Merchant Cash Advance Near Me
Merchant Financing programs are viable options for obtaining working capital, but you have to analyze your business situation meticulously. Do not take the easy way only to regret within months when cash flow problems threaten operations. Start by comprehending your business goals and measure them against the current health of your company and future projections.
Many entrepreneurs skip this step and find themselves drowning in debt for loans they should never have applied for in the first place. When you have a grasp of what is needed for growth, you can choose merchant cash advance or other financing methods. If you decide to go the former route, reach out to Wide Merchant Group at 800-630-4214 for a free consultation.