A merchants cash advance has both positives and negatives. Imagine that you have a thriving retail business. Things are going well for you, and you have, among other things, a merchant account. This means that you have plenty of receivables in terms of credit and debit card transactions. Your business is positioned to grow, but in order to do that, it needs some kind of infusion of cash. In other words, it needs financing if it is going to really take off and get as big as it possibly can. It’s very difficult for new businesses, especially, to obtain bank financing, because they don’t have much history on which to base their request, and lenders therefore have no idea whether the business is a safe bet or not. This is a situation in which you might consider a merchants cash advance rather than a more traditional, conventional bank loan. Whether you qualify and whether that merchants cash advance depends on the nature of your business, your financial background, and the industry context in which you conduct your business.
When your business applies for a merchants cash advance, chances are pretty good that the company issuing the merchants cash advance will want to look at your account history, your past debit and credit card receipts, your bank statements, and so on. Your credit rating will come into play, good or bad, and so will your tax history, as well some other documentation. Past performance, as always, is the most reliable indicator of future performance. What the company issuing the cash advance is trying to determine, of course, is whether you can reasonably cover that advance and then pay it back. If your company is doing well and you have enough evidence that you will generate future sales that provide incentive for the company to issue the cash advance, you will likely qualify, and you will qualify relatively quickly. Getting your business that infusion of much needed cash in a lump sum is therefore relatively quick too. In some cases, it may even be possible to get a the cash same day, or within a single day of operation.
By contrast, if you apply for a bank loan, chances are again pretty good that bank will want to look at your account history, your past debit and credit card receipts, your bank statements, and so on. Your credit rating will come into play, good or bad, and so will your tax history, as well some other documentation. Past performance, as always, is the most reliable indicator of future performance. What the bank is trying to determine, of course, is whether you can reasonably cover that loan and then pay it back. And then you will wait.
And you will continue to wait. The process of reviewing your loan application can take weeks, and those weeks can stretch into months. There are times that, even if your business is doing very well, you may not qualify for the loan, and you will be denied the credit you desperately need to keep your business going. Well, the good news is, when you apply for a merchants cash advance, you are applying for something that is not a loan at all. You’re not actually borrowing the funds from a bank. You are trading a percentage of your future sales for the lump sum of cash that you receive. You’ll pay that percentage of future sales for the time that the advance is outstanding, and when you can finally repay the advance, the percentage of sales you are giving up will finally stop. Compare this to a bank loan, which has a specific schedule of set payments for a specific amount. A merchants cash advance, by contrast, is variable and repaid on a schedule that you determine based on your ability to pay. The amount taken from you in sales, because it is a percentage, varies depending on how well your business does. In the wake of the credit crunch of 2008, it’s a fact that lots of businesses that might otherwise have been able to get credit no longer can, because the credit market has tightened up. Merchants cash advances are one way that those companies that could not otherwise acquire credit can get the cash infusions that they need to operate during cash-poor times.
PaymentPop had quite a bit to say on the topic of merchants cash advances: “Merchant cash advances have been gaining in popularity ever since the 2008 financial crisis, when banks tightened up their small business loan restrictions and business owners had to look elsewhere for funding. They’ve only recently become a mainstream issue, though, thanks to increased media coverage and mobile payments giant Square’s decision to start offering a merchant cash advance service. Much like the cash advance programs offered by its competitors, Square Capital has quickly attracted its share of both praise and criticism from industry observers who disagree on whether these loans-that-aren’t-really-loans are ethical. Are merchant cash advances simply scams that prey on desperate merchants, or are they a low-risk source of funding for business owners who can’t secure loans from risk-averse banks? The answer is yes. Or no. It actually depends. [A merchants cash advance is] very similar to a loan, but it’s technically different. This is where we encounter the main criticism of merchant cash advances: merchant cash advances are classified as “Purchases and Sales of Future Receivables” rather than as conventional loans, so they aren’t subject to usury laws. Usury laws are in place to prevent predatory lenders from charging excessive fees or enforcing unfair repayment terms, and they’re generally seen as a vital form of protection for borrowers. Those regulations don’t apply to merchant cash advances, meaning that there are no limitations on the interest rates that can be attached to merchant cash advances. For instance, the maximum interest rate on a loan through the Small Business Administration (SBA) is 6%. Merchant cash advances, however, often have effective annual percentage rates (APRs) well over that amount. By the standards of a conventional small business loan, [the typical merchants cash advance interest rate] is astronomically expensive. But there are other features of a merchant cash advance that can make it an appealing option for some merchants. For one thing, cash advances are usually repaid through a seamless daily deposit of a portion of the merchant’s credit card sales rather than in large monthly installments. So instead of setting aside a specific amount of savings each month for the impending loan payment, the merchant will simply give a percentage of each day’s credit card sales to the merchant cash advance provider. …Although this form of repayment can take a serious chunk out of a business’s daily revenue, the merchant has the comfort of knowing that the advance is automatically paid back in small increments on slow days or in large increments on busy days.”
The article goes on, “Another key feature of merchant cash advances is that they usually come without the need for collateral or a personal guaranty. The merchant cash advance provider assumes the risk of the business failing when it purchases that business’s future sales, so if the merchant’s store goes under, the cash advance simply isn’t repaid. Similarly, merchant cash advances don’t usually require monthly minimum payments, fixed interest rates, business use restrictions, or strict repayment deadlines. This degree of flexibility can be enticing for merchants who don’t wish to deal with the application and budgeting processes associated with traditional loans. Merchant cash advances aren’t as dangerous as their critics claim, nor are they as safe as their defenders claim.”
Among the risks and benefits of merchants cash advances are high effective APRs, as noted. These can far exceed what is considered legal or usurious for a more traditional source of financing like a bank loan. The percentage of future sales that is taken in exchange for the merchants cash advance reduces your overall business revenue, obviously, which takes money out of the business. This means that if you don’t go with a reputable merchants cash advance provider, you are potentially dealing with a ‘predatory” lender, and there may even be hidden fees involved.
“Most merchant cash advances are established either directly through a merchant account provider or through that provider’s third-party affiliate,” the article concludes. “Although it is necessary for credit card processors to work with merchant cash advance providers to correctly route credit card sales, it is their responsibility, not yours, to work out the method by which they will integrate their services. It is not recommended that you switch merchant account providers just to obtain a merchant cash advance.” The piece goes on to point out that some providers use high-pressure, aggressive collection tactics, which just underscores the need to find a reputable firm like Infiniti Funding for your financial solution.
Trish Lindemood, meanwhile, writing for Denise O’Berry, says “Let’s assume that your business takes in $20,000 in credit card receipts per month and a funding company is willing to purchase 20% of those receipts over the next 6 months. During that time period, you would be expected to take in $120,000 in credit card sales ($20,000 x 6 months). 20% of that amount would be $24,000 (this represents the amount the funding company agrees to buy from you). To determine the amount you would receive, the funding company would divide that amount by a factor rate (i.e. 1.30 for 6 months). Therefore, you would receive an upfront payment of approximately $18,461. ($24,000 divided by the factor rate of 1.30). The difference between the amount you pay back over the next 6 months ($24,000) and the amount you receive ($18,461) represents the FIXED COST of the money. In this case, the cost to use that money is $5,539. As you can see, it is an expensive form of business financing – and is not right for all businesses and all scenarios. However, there are a few benefits to consider before deciding if this form of funding is right for you: The funds are unsecured. This means that you don’t have to pledge any personal collateral to obtain a Merchant Cash Advance. Therefore, if you go out of business through no fault of your own, the funding company is not going to come after your house, your car or other tangible assets. Note I said “no fault of your own” – in cases of fraud or deliberate non-payment, many funding companies will aggressively pursue repayment through whatever means necessary. A Merchant Cash Advance will not tie up your available credit – and won’t show up on your credit report. This is because this product is NOT a loan. Instead, it is classified as a ‘True Sale’ – meaning that an asset (your future credit card sales) was traded in exchange for monetary consideration. The funding company isn’t lending you anything – they bought something of value from you instead.
Lindemood goes on, “Payments are automatic. They are collected each day as you batch out your credit card transactions as you normally would. Therefore, you don’t have to write out a check each month – or worry about accruing late or missed payment penalties. They are available to many business types that have a difficult time obtaining traditional bank financing, including restaurants and younger businesses without an established credit history.
As with any decision you make in your business, the choice to use a Merchant Cash Advance should come down to the potential Return on Investment (ROI). If there are less expensive options available to you and your business, by all means explore them first. If not, the most important question to ask yourself when considering a Merchant Cash Advance is ‘Can I take this money and use it to make more money than it cost me to use it?’ If the answer is yes, this option may be worth exploring further.” Contact Infiniti Funding today for more information concerning a merchants cash advance. Let us tailor your solution.