Dilemma: You can’t make more money until you expand your business, you can’t expand your business until you make more money.
The unfortunate truth in the business world today is that banks prefer to lend large amounts and only to businesses that are of a considerable size. This leaves small and medium sized businesses who may only need a small chunk to help them expand or buy a new piece of equipment out in the cold. Not to mention the rigid underwriting guidelines and mountains of paperwork required to even qualify for a traditional business loan leaving many businesses without the option of ever being approved. While there are hard money loans, they are not always the best answer with their exorbitant rates. Many business owners don’t even realize that there is another option available to them when they fall into these types of categories. This perfectly viable option that merchants might not realize is available to them is a cash advance through their Merchant Service Provider called a “Merchant Cash Advance”.
First of all, what is a Merchant Cash Advance and how does it work?
This type of cash advance allows merchants and business owners to “borrow” against the future revenues of the business. The business will then pay back the advance along with a predetermined interest over time through a process called a “hold back”. Payments are made through a practice where a certain predetermined percentage of daily receivables are withheld by the MSP from funds owed and used to pay back the cash advance. This process will continue until all of the cash advance plus interest is returned to the acquiring bank. The amount of advance that is needed, how much time will be needed for repayment, and the businesses total monthly revenue all help to determine the percentage of revenue that will be held back from the credit card transactions for the purpose of repayment.
While the rates may, at first, seem high in comparison to a traditional business loan, it is important to keep in mind that the total fee is predetermined and is not compounded over time. If it takes longer to pay the loan back you do not pay more in interest like you would for a loan that is compounded. With loans that are compounded over time, the interest rate will stay the same but the longer it takes to repay the loan the more you pay for borrowing the money at the end of the day. The total fee for the Merchant Cash Advance, however, is predetermined prior to advancing the funds and is represented as an interest rate, but it will not cost more if it takes the merchant longer to pay back the advance because it is a flat rate.
How does one qualify for a Merchant Cash Advance?
Thankfully, the risk evaluation process is much different (and simpler) than a traditional bank would take when approving a business for a loan. Usually, the merchant’s daily credit card sales volume record is sufficient to determine eligibility. You will need to provide the MSP (merchant service provider) with bank statements and reports of prior months credit card transactions along with your application. Generally a business can expect approval between 24-72 hours and have their funds deposited into their bank account within 48 hours.
Usually, a merchant cash advance is a viable option for businesses that are unable to get a traditional business loan simply because the credit requirements are quite a bit less stringent than they are for a small business loan. The fact is almost 80% of SMBs are declined for a small business loan.
Business owners love the quick access to cash. Because they are typically easy to be approved for and fund quickly , this type of loan could also work for any businesses who need money quickly and don’t have time to jump through the hoops and typical red tape of a SMB loan. While it usually will take a few days to be approved for a merchant cash advance some have been approved in mere hours and had access to funds within 48 hours.
No collateral required. This is not only a huge benefit but also lends to the fact that you will not need to come up with a certain portion of the value of the item you will be purchasing yourself. For example, most banks will only loan up to a certain percentage of the total value of the item you need, and the business needs to front the difference. Merchants who decide on a merchant cash advance will often be able to borrow anywhere from 1 to 5 times their monthly volume. With a cash advance you decide how much you need, make sure you qualify for it and you’re good to go.
Flexible repayment schedule. Because the repayment relies on a percentage of the businesses daily transactions when it is busy and sales are high the business pays the advance back faster. Alternatively, when business is slow, your payments are still relative to the amount of sales, so the business isn’t stuck trying to come up with a huge payment even when business is slow and revenue is low.
Do you have to process credit cards to obtain a merchant cash advance? Absolutely not. There are a lot of MSP out there stating that you must be processing credit cards through a merchant account to obtain this type of advance. That isn’t necessarily true. While there are a lot of processors out there who are unable to provide this service, Bankcard Brokers is absolutely capable of providing this service. There are quite a few business types that are unable to get a merchant account. Many businesses, such as any cannabis business, are unable to qualify for a merchant account or have been put on the acquiring bank’s list of prohibited merchants. With this option, these unfortunate businesses are still able to qualify and benefit from a merchant cash advance program.
When would it not be a good idea to use a merchant cash advance?
If you are looking for a way to increase your credit worthiness a merchant cash advance may not be the option for you. Unfortunately, this type of advance will not be reported to the major credit bureaus so the payment history will not help you with your credit profile. However, it does help you build credit worthiness with your merchant service provider and acquiring bank. The fact of the matter is when you have demonstrated that you can pay back your cash advance the more likely they are to give you another, possibly larger, cash advance in the future.
When you are ready to expand your business, remodel, upgrade equipment, or boost inventory make sure you are considering all the options available to your business. A merchant cash advance may just make the most sense. Make sure that before considering any type of loan option you are taking into account what the total effect will be on your bottom line. Your balance sheet and revenue forecasting tools will help you do your due diligence to make sure your business remains within a healthy profit range prior making any commitments.
Bankcard Brokers is proud to have a staff of brokers who maintain the highest level of professionalism and are all ETA Certified Payment Professionals. We realize it is an important decision who you entrust your credit card processing and the security of your customer’s data as well as borrowing options for your business. At Bankcard Brokers we strive to remain knowledgeable about the products and services we offer and promise to serve our clients with a commitment to professionalism and personal integrity. Call Bankcard Brokers today and experience the “Bankcard Brokers Difference”.