A merchant cash advance is an alternative to a traditional business loan that you would normally receive at a financial institution such as a bank. The way in which it works is that the lending company gives a lump sum payment to a business in exchange for an agreed upon percentage of their future credit card receivables. This type of agreement is known as a factoring agreement as the lending company is in essence purchasing future income from the merchant as a discount. The way in which the merchant cash advance company generates their repayment is through taking an agreed upon percentage of the businessesâ€™ daily credit card receivables. The lender keeps taking that agreed upon factoring rate from the merchantâ€™s credit card processing until repayment has been made in full. An astute observer would inquire as to how exactly the cash advance company is able to take their factor rate from the credit card processer. Often, most lenders form partnerships with credit card processors and are consequently able to take payment directly from the processing terminal. The normal niche that business cash advance companies reach out too are retail businesses that are not able to qualify for traditional bank loans. There are a plethora of reasons as to why a retail business could be declined by a bank not limited to credit history, however, one of the more prominent reason is the tightening of bank lending as a result of the 2008 subprime mortgage crisis. While these loans are eminently helpful to businesses that seek to expand but were declined by banks, the factor rate that is charged is often a lot higher than the interest on a bank loan. Many factor rates range from 10 to 100% effective interest which is exceedingly high. This often brings up confusion regarding whether such a small business cash advance could be construed as a usurious loan and consequently be illegal. The fact of the matter is that a factoring agreement is not a loan it is merely a sale of a portion of future credit card receivables. While these factoring agreements charge a substantially higher effective interest rate than a traditional loan, there are numerous advantages for the merchant. For one, the payments to the lender fluctuate in line with sales volume; therefore the merchant is better able to manage their cash flows during slower sales volume parts of the year. Another major advantage is the fact that merchants are held to an easier standard when being approved for a loan application than if they were dealing with a bank. Moreover, the merchant cash advance application is quite rapid compared to receiving approval for a bank loan.
Published on Sep 5, 2012
This PDF introduces you to the concept of a merchant cash advance which will allow your business to generate the expansion capital it needs...