What do most business owners do when they decide its time to expand? They start looking into an SBA loan or go straight to their bank to apply for a business loan. Unfortunately, there are many difficulties when it comes to acquiring business capital. SBA loans are notoriously hard to qualify for. Big bank loans are wrought with red tape and don’t favor the “little guy”. Big brand banks historically prefer to lend to bigger companies with long business history. And they really don’t like to loan on the smaller packages.
There is just too much risk with new businesses. This leaves smaller businesses in a pickle. If you haven’t been in business very long, you’re still building your credit, or maybe you aren’t looking for a huge sum of money, they don’t want you. Stringent guidelines and discriminations leave small business owners without any options for getting business capital the traditional way.
What many business owners don’t realize though, is that there’s an option for acquiring business capital from their current Merchant Service Provider. One that doesn’t require you to jump through hoops give your right arm. This option is called a merchant cash advance, and it can be the perfect answer when traditional loan options fail you.
2019 SBA loan approval statistics:
This means that almost half the loan applications at small banks are declined. And big banks decline more than 70% of loan applications turned in to them. It’s even more deflating when you learn that of the loans that were approved, 53% resulted in financing shortfall. A financing shortfall occurs when the borrower is approved for a loan that is less than the amount they were asking for. You go through all that hard work and waiting, and don’t even get the money you need.
What makes a merchant cash advance for acquiring business capital different?
A merchant cash advance is a great option for companies who are unable to get financing through traditional lending channels, such as SBA loans. From the simple approval process to the quick funding, a merchant cash advance is everything a traditional loan isn’t. Many banks shy away from lending to high-risk businesses and companies that operate under difficult laws and regulations. Merchant cash advances are available to all types of merchants.
Fast approval and funding – most of the time just a couple days, and use of funds can be literally anything. The amount of the advance is based on business credit card processing volumes, so approval isn’t judged solely on creditworthiness. Businesses can borrow anywhere from 1 to 5 times their monthly credit card processing volume.
Once you figure out your volume, and how much you need, you can do whatever you want with the money. You are allowed to use the money for any purpose you wish. Buy new equipment, expand the property, purchase inventory, whatever you see fit.
With a merchant cash advance, the business isn’t required to put up collateral against the loan. Nor is there a requirement to front a certain percentage of the value of a purchase as is required when buying equipment.
Quick overview: How a merchant cash advance works:
Qualifying for a merchant cash advance
The risk evaluation process is simpler and quicker than a traditional small business loan. The main factor in approval and amount of advance is total sales volume along with credit card processing volume history. You will need to provide a report of the prior month’s credit card transaction volume and bank statements along with the application.
Don’t process credit cards? No problem!
You’ll find that many processors do require a business to be processing credit cards through a merchant account. Unfortunately, there are many business types that are unable to get a merchant account. Certain high-risk companies have difficulty getting approved to accept credit cards, others stick to cash only. Even if you’ve been placed on the acquiring bank’s list of prohibited merchants, you can qualify and benefit from a merchant cash advance.
Bankcard Brokers can provide these services even if you aren’t processing credit cards. Eligibility will be determined by the business cash deposits from your bank statements. This simple process makes it a very approachable option for businesses that don’t qualify for an SBA loan.
Before you sign anything you will receive a full break down of all terms, rates, and repayment percentage. Everything you need to make an informed decision.
How much does it cost?
The fee for a cash advance is based on a flat rate as opposed to an interest rate. This is called a factor rate. The total fee for the money is predetermined and fixed, so it won’t compound over time. Because of this, paying it off sooner won’t save you money. But, at the same time, if it takes longer to pay the loan back, you won’t pay more in interest. These types of advances are a bit more expensive than traditional loans. But when you take into account that the business puts up no collateral and the lender takes on the liability in the event that the business fails, you can see why.
How do you pay it back?
Paying back a merchant cash advance is simple. It can be paid back as a percentage of processing sales OR a fixed payment, you choose. Your payment is based on a predetermined percentage of your credit card processing volume. Your processor will take into account how much money is needed, how long the repayment period will be, and the business’s total monthly revenue to determine the correct percentage for monthly payment. Before depositing your processing funds, the bank will hold back the determined percentage (or fixed payment) as payment for the advance. This process is generally referred to as “hold back” and will continue until the advance is repaid.
The most desirable aspect of the payment expressed as a percentage of monthly volume is flexibility. When sales are higher, you will make a bigger payment. But when business is down, so is your payment. This allows businesses to have more control over cash flow in downtimes. You won’t have to worry about coming up with a big loan payment when you aren’t doing as much business.
Benefits of a merchant cash advance:
No Collateral -You’re not required to come up with a percentage of the item or put up any part of your business or personal assets as collateral.
Fast approval and fast funding-With minimal application requirements businesses can get approval in 24-72 hours.
Quick funding-funds can be deposited into the business’s bank account within 48 hours of approval.
Use it however you want. Need an equipment upgrade, or an expansion? Whether you want to fill a large purchase order, stock up on inventory for the peak season, or kick off a marketing campaign-you decide.
Flexible payments perfect for businesses with fluctuating or seasonal sales.
Things to consider when looking to acquire business capital through a merchant cash advance.
As we’ve covered, a merchant cash advance will be more expensive than a traditional bank loan, assuming you qualify. But, they are less expensive than a hard money loan that notoriously carries around 20% interest or a percentage of your business.
These types of cash advances are regulated by the Uniform Commercial Code in each state, as opposed to banking laws such as the Truth in Lending Act. Be sure to work with a reputable processor and thoroughly go over your advance agreement. The last thing you want to do is get yourself into a debt cycle. As with any loan obligation, do your due diligence and make sure you can afford your repayment plan before committing.
You won’t be increasing your credit score with this type of loan. The payments are not reported to the credit bureaus. However, you will be building your creditworthiness with your processor and/or acquiring bank. In the event that you want another, maybe even larger, advance in the future they’ll be happy to oblige.
Have you dreamt of expanding your business, carrying a new product line, or branching out? At Bankcard Brokers we strive to serve the needs of our clients with integrity and transparency. All of our associates are ETA-Certified Payment Professionals. Not only have they completed the rigorous certification, but each has taken an oath to continued education and to abide by the ETA’s Code of Conduct.
Ready to find out if a merchant cash advance is the right path for your business? Give us a call and experience the “Bankcard Brokers Difference”.