There comes a time within your business life cycle that you have to address the all-important aspect of financing. You will require funds for your venture’s growth, investment, or restructuring goals. Merchant financing is one option our company, the Wide Merchant Group offers a finance package for businesses within the United States, and Puerto Rico. The following article provides an in-depth analysis as to what merchant financing is and what it means for your business.
Understanding Merchant Financing
Merchant financing, as the name suggests, is a financing option available to small to medium sized businesses. The business funding is packaged for business entities that receive a total minimum of $10,000 in their bank accounts. The package is also referred to as Merchant Cash Advance (MCA).
Merchant financing is not a loan package. It is a financing alternative for business owners. The financier provides you cash in exchange for a service fee and a percentage from your bank deposits for ACH merchant financing, or a percentage of your credit card sales for a credit card-based financing. Such financing is great news for businesses looking for quick funds with no collateral requirement. Business owners are further saved from the bureaucratic loan processing systems that require a history assessment to gauge your viability to receive funds. This means that you can access merchant funds despite a poor credit rating.
The Merchant Financing System
Merchant financing systems are founded on three integral units:
- The applicant,
- The financier, and
- The banking/credit card system.
Financing starts with your application for the said funds. Your intentions inform the amount you request for in the Merchant Cash Advance request. Once you determine the amount you need, look for a financier who offers friendly terms for the financing. Once you zero-in on one financier and agree to the terms, they will recommend a debit/card system (if you apply for credit-card based financing) with their deduction terms in place or incorporate the rates in your existing debit/credit card system.
The credit/debit card system is sales based. This means that the system deducts your daily debit/credit card sales to the tune of the fees and repayment terms agreed upon with the financier. Therefore, more sums are deducted when business is good. On slow days, you pay less. Consequently, when your business is not in operation, for example, over the holidays, no charges will be deducted from the system.
If you’re applying for ACH-based merchant financing, a recurrent payment plan will be established and debited from your bank account via ACH. This option is preferred by most merchants as they are not required to switch credit card processors, and the recurring payment plan is predetermined, and split into payments of the same amount which makes it easier to project when the total balance will mature.
Merchant Financing terms are reliable. You can get the funds you apply for within 72 hours. The sums provided in this option are adequate to make a substantial impact on your financial needs and the rates are friendly. Most financing packages come with a fixed factor rate that doesn’t increase, since it doesn’t have a daily interest rate like most traditional business loans.
Requirements to Secure Merchant Financing
While merchant cash advance providers may not require you to provide security for the sums you request, they will need some assurance that you will honor the repayment agreement, thus the need to meet specific requirements. Think of these prerequisites as minimum qualifications, part of their Know Your Customer (KYC) initiative, as well as an assessment of the sums you qualify for.
The requirements to attach with your application include bank and/or credit card statements, driver's license, a credit rating of at least 500 (for some MCA providers), and in some cases, business tax returns. Your business should have been in operation for at least 6 months, although some financiers will require that that a business has been in business for at least one year. Finally, the financier will look out for your debit/credit card statements to evaluate the value of your sales.
Identifying a Merchant Financing Provider
Merchant Cash Advance funding has various providers in the market. The key to selecting a perfect fit in a merchant financing provider is by using the following four evaluation aspects; Merchant Cash Advance limits, holdback percentages, factor rates, and customer reviews.
Merchant Financing Limits
Various companies offer different financial limits with more established firms offering higher limits than new competitors in the business. It is your responsibility to first determine what financial injection you are looking for your business. This determination informs your choice of a merchant financing provider.
Holdback percentages are sums the service provider will retain until all conditions of the facility are met. The amount, a fraction of your debit/credit card sales, determines the sums that will be remitted to the service provider. If the provider charges you high holdback percentages, the amounts paid to the MCA provider will also be high.
Factor rates determine the daily payback sums. The rates also are critical in determining the cost implications for the funding. Factor rates are determined by the information you provide to the financier. Details of how long you have been in operation, your debit/card statements, as well as bank statements, are information sources that determine your risk potential in honoring your repayment obligation. Therefore, the higher your risk potential, the higher the factor rate charged. Most firms have a comparative tool that you can use to compare and get the best rates in the market.
Customer reviews offer insight into the MCA provider’s operations. Information on their services and their systems will be detailed in customer reviews. All these details prove essential when deciding on which lender to seek a merchant cash advance from.
The Value Merchant Financing Offers to Businesses
An overall assessment of the benefits and the drawbacks of merchant financing offers a picture of what these funds mean for your business. Understanding both the good and the challenges of merchant cash advances will help you decide whether the financing option is in line with your objectives.
The following are the four main advantages you can expect from merchant financing.
Merchant Financing Does Not Affect Your Credit History
With merchant financing providers are not concerned with your credit history. As such, taking up the merchant financing option and servicing the facility will not affect your credit rating. This is good news for business owners with no or little credit information.
Business owners can easily access merchant cash advances. It is among the quickest funding options available in the market. Application prerequisites are easy to comply with. While the requirements may be within the operating model of merchant funding, most financiers may overlook aspects such as your credit history and provide you with funding if they find your business financial statements to be healthy.
Automated Payment Systems
Credit repayment remains troublesome for many business owners, a problem corrected in merchant financing. The greatest challenge in loan or credit repayment is found in reconciliations and the remittance of said funds to the creditor. A business owner has to deduct the sums owed to a creditor from their sale’s revenue and wire the amounts to the creditor. The risk with this system is evident when the amount is not remitted on time or in cases of failed payments. Business owners in such situations have to pay additional fees for non-compliance with the agreed terms.
The case is different with merchant systems. The sum owed to a financier is automatically remitted with every debit/credit card swipe. Such convenience takes away the responsibility of reconciliation and remittance from the business owner. Further, the payment terms are convenient. They are based on your daily sales. Therefore, you only part with sums commensurate to your business sales.
Fortunately, most merchants end up with an ACH-based merchant financing product where small installments are debited on a recurring basis until the total amount owed is paid-off.
Three aspects stand out as significant drawbacks of a Merchant Cash Advance. They are:
Daily Remittance Can Affect Your Business Cash flow
Deductions are made automatically with every debit/credit card sale made. This means that the sums that will reflect in your account will be less the value deducted. On some occasions, business entities delay paying their creditors for a specific period to reorganize their cash flows. Merchant financing denies business owners this opportunity.
Short Repayment Terms
Short repayment periods are problematic, especially for those looking for long-term financing. Merchant financing lacks the repayment grace period you would receive with conventional financing. Further, there are no incentives for early repayment.
Merchant Cash Advance as an Alternative to Business Loans
The credit facilities landscape is ever-changing. The growing demand for business financing has created an avenue for merchant financiers to offer credit facilities. As a business owner, you will need a financing option that addresses your capital needs. You have access to both business loans and MCAs. The more important question to address is, ‘How do they compare?’
You have seen the workings of a merchant financing option. Looking at business loans will offer perspective as to what financing option best suits your capital needs.
What are Commercial Loans?
Business loans are credit facilities offered by financial institutions such as banks. Business loans are offered within the legal provisions of California’s Financing Law. The statute guides the operations of lenders who provide commercial/ business and consumer loans. It is worth noting that the provisions of this law do not apply to alternative financing providers. They are only required to offer full details of their products by California’s Disclosure law.
Whereas it may be easier to access merchant financing, you are limited in the amount you can access. Commercial loans offer larger sums. Access to such funding, however, is limited to you meeting a few prerequisites.
You Are In Need Of Large Capital Sums
Your financial needs determine which credit source to go for. Commercial loans are ideal for large capital requirements. You too have to be clear as to whether the credit facility will finance your business in the short or long run. If you need a financing option that will run for more than five years, a commercial loan is your best bet.
Availability of Collateral
Collateral is a prerequisite when applying for commercial loans. The sum you can access in your business loan application makes it mandatory to have a guarantee (collateral) attached to the loan request. Banks can dispose of the guarantee should you default on your loan.
You Have a Good Credit Rating
Access to commercial loans is pegged on your credit history. Banks extend loans to individuals with a credit score of 640 and above. Instances of tax lien or bankruptcy are not a good showing on your credit report, and they need to be avoided.
When are merchant cash advances a suitable alternative to commercial loans?
Merchant cash advances are an excellent alternative to traditional business loans in the following circumstances.
When You Are Operating a Seasonal Business
Seasonal businesses require short-run financing to meet the capital requirements associated with peak seasons. If this is your venture’s model, you should opt for merchant cash advances. The rates will be friendlier because you will only repay the sum due with respect to the sales revenue generated.
You Do Not Want the Loan to Reflect on Your Credit Report
Merchant financing is the best alternative when you are looking for funding that will not reflect on your credit history. It is ideal for business owners who are rebuilding their credit history as well as those planning big purchases.
You Run an Online Business
Merchant financing is ideal for online business. Online sales are mostly paid through debit/credit cards, and their financial requirements are not as high as store-front businesses. Repaying the financing option also becomes easy because it is based on a charge for every purchase.
Funding decisions in businesses are based on the capital requirements, business model, and the ability to repay the amounts. Factoring in all these issues will help you determine what financing option works best with your financial goals. This is the best evaluation criteria to decide whether to seek commercial loans or merchant cash advances.
Find a Merchant Financier Near Me
Ease of access and convenient repayment systems best summarize what merchant cash advances are and what they offer. If you operate a large debit/credit card purchase business or a seasonal business, MCA is your ideal financing option. Wide Merchant Group provides merchant financing packages at competitive market rates and flexible payment terms within the shortest period, from 24 hours to no more than 72 hours. Give us a call today at 800-630-4214 for more information on our business financing solutions.