Have you ever heard of a Merchant Loan? As a business owner, are you aware there are ways to raise business capital with just your merchant account? This business capital is even available to merchants with a high-risk merchant account. Most business owners have never heard of a merchant cash advance for business capital. When they need cash to improve their business, they do what most business owners do.
What do most business owners do when they're ready to improve, upgrade, or expand their business? Usually, they turn to the Small Business Administration to see if they qualify for an SBA loan. Sometimes they just go straight to their bank to apply for a business loan. But a surprising number of businesses won’t qualify for a traditional small business loan.
There are many difficulties when it comes to acquiring business capital. SBA loans are notoriously hard to qualify for. Big bank loans are fraught with red tape and, historically, do not favor the “little guy”. Big brand banks prefer to lend to bigger companies with long business history. And they really don’t like to loan on the smaller packages.
SBA loan approval statistics are pretty dismal.
According to the Biz2Credit Small Business Lending Index, 2019’s approval percentage at big banks was a slim 28.2%. Small banks were able to approve about half, 50.5% of their loan applications. These stats show us that smaller banks decline almost half their loan applications. And big banks decline more than 70% of loan applications turned in to them.
And maybe even more disappointing to learn is that of the loans that were approved, 53% resulted in a financing shortfall. A financing shortfall occurs when the borrower is approved for a loan that is less than the amount they were asking for. After all your hard work and anticipation, you don't even get the money you need.
There is just too much risk with new businesses. This leaves smaller businesses in a pickle. If you're a small business, a newer business, or you haven't yet built your good credit history, you likely won’t qualify for an SBA loan. And if you aren't looking for a huge sum of money, they don’t want you.
Stringent guidelines and discriminations leave small business owners without many options for getting business capital the traditional way.
What many business owners don't realize, though, is that there’s an option for obtaining business capital from their current Merchant Service Provider. And it’s one that doesn't require you to jump through hoops or give your right arm. This option is called a merchant cash advance or a merchant loan. It just may be the perfect answer when traditional loan options fail you.
What makes a merchant cash advance for 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 advance financing is available to all types of merchants.
Fast approval and funding - most of the time you can have your money in just a couple of days, sometimes within 24 hours. Because they base the amount of the advance on business credit card processing volumes, approval isn’t judged solely on creditworthiness. Businesses can borrow anywhere from 1 to 5 times their monthly credit card processing volume.
But the freedom to use the funds however you see fit is the real bonus. Once you figure out your volume, and how much you need, you’re one step closer to your goals. 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. Down payments are commonly required by banks when buying equipment.
Quick overview: What is a Merchant Cash Advance? How a merchant cash advance works:
From the name, you may have gathered that this is a cash advance. A merchant cash advance is not considered a loan. Instead, your merchant account provider is advancing money to you against your future credit and debit card transactions. They are giving you a lump sum of cash upfront based on your monthly credit and debit card transactions. In the simplest terms, it is an advance of your future earnings. You will pay back the advance through the withholding of a percentage of those credit or debit card sales as they come in.
How do you pay back a merchant cash advance?
Paying back a merchant cash advance is simple. With a Merchant Cash Advance (MCA), you do not have set payback time limits in your terms. Most traditional business loans you're familiar with will be for a set term. You borrow X dollars at a certain rate and pay it back at X amount per month for 60 months.
MCAs are 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.
MCA repayment varies depending on many factors that have to do with the business’s sales volume and the amount needed. Generally, MCA’s are paid back in under 12 months. Depending on the circumstances, it can be as short as 6 months, or extended to 18 months.
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 your monthly payment. This means that the length of repayment depends on your sales volume.
MCA payments are generally withheld on a daily basis from your credit and debit card transactions. However, some banks will offer a weekly withholding. You just have to decide which works best for your cash flow.
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 amount expressed as a percentage of monthly volume is the 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.
How much do they cost?
They base the fee for a cash advance 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.
As we pointed out before, the bank’s evaluation of your business will determine the factor rate you receive. Typical factor rates range anywhere from about 1.14 to 1.5. To put it into perspective, let’s calculate an example.
Let’s say you need $30,000 for improvements. Your merchant account provider is able to advance you the cash at a factor rate of 1.18. Together, you’ve determined you will repay the advance at a rate of 15% of your daily transaction volume.
30,000 X 1.18 = $35,400. This means it will cost you $5,400 to borrow $30k. How long it takes to pay back will depend on your credit and debit card volume. Let’s say you do, on average, $1000/per day in transactions. At a rate of 15%, they will withhold $150/day from your transactions until your advance is repaid. Assuming your volume stays consistent, it would take you almost 8 months (236 days) to pay back the total amount.
Consider there may be additional fees on top of the factor rate. Some companies charge an administrative fee for setting up your account.
Factor rates, interest rates, and APR are different ways of calculating the costs of borrowing money.
Your APR is the annual cost of an interest rate, including any other fees and charges incurred with the loan amount. On the other hand, an interest rate is the amount your loan will cost expressed in a percentage. Your interest rate will not include additional fees or other costs incurred in addition to the loan amount.
You can find a comprehensive formula for calculating factor rate and converting it into an APR for the purpose of comparison here.
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.
Qualifying for a merchant cash advance.
The risk evaluation process is simpler and quicker than a traditional small business loan. The main factor in both approval and amount of advance is consistent sales volume and 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.
It's important to point out that if you're getting your merchant cash advance from your current processor, the process is even easier. After all, they have been working with you for a while and are privy to your processing volume, consistency, and history.
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.
That’s another reason why merchant advances can be beneficial. 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.
At Bankcard International Group, we can provide these services even if you aren't processing credit cards. We can determine eligibility by reviewing 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 breakdown of all terms, rates, and repayment percentage. Everything you need to make an informed decision.
Benefits of a merchant cash advance:
No Collateral Businesses are 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. Funds are even accessible to businesses with bad credit.
Quick funding-funds can be deposited into the business’s bank account within 48 hours of approval.
Use it however you want. Obviously it's best to use it for improvements that will yield profits. Need an equipment upgrade, or an expansion? Perfect. Just looking to purchase more inventory or cover payroll? This is a reliable short-term option. 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. Since the repayment fluctuates with your sales volume, you won't need to come up with a large payment when you're low on profits. This helps keep businesses from falling into default.
Things to consider…
- As we’ve covered, merchant cash advance financing will be more expensive than a traditional bank loan, assuming you qualify. But they are less expensive and more flexible than a hard money loan that notoriously charges high interest rates or a percentage of your business.
- Because all interest costs are negotiated up front, there’s no benefit to paying it off sooner.
- You won’t be increasing your credit score with this type of loan. These types of 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.
- Continuous daily deductions from your sales transactions will reduce cash flow. Merchants need to make sure they can still accomplish day-to-day operations while giving up this repayment percentage.
- Some banks that offer merchant advances require you to sign a personal guarantee.
- You’ll want to give deep consideration to signing a personal guarantee. The lender includes a personal guarantee as a legal clause to protect themselves in the event of a default. When you sign a personal guarantee, you are agreeing that you will be personally responsible for the debt in the event that the business is unable and defaults on the loan. This means the lender can legally seize the business owner’s personal assets.
- The merchant advance industry does not operate under oversight from the Federal Government. The cash advance is not regulated the way loans are because they are considered commercial transactions. Loans are regulated through banking laws such as the Truth in Lending Act. Instead, these types of cash advances are regulated by the Uniform Commercial Code in each state.
Be sure to work with a reputable processor and thoroughly go over your advance agreement. Contracts can be confusing; you will have varying terms, factor rates, and “holdbacks”. Make sure your merchant services provider is willing to explain all aspects of the advance. If they’re using high-pressure sales tactics or gloss over it, that's a sign to keep looking.
The last thing you want to do is get yourself into a debt cycle simply because this seems like “easy money”. As with any loan obligation, do your due diligence and make sure you can afford your repayment plan before committing.
Have you dreamt of expanding your business, carrying a new product line, or branching out? At Bankcard International Group, we strive to serve the needs of our clients with integrity and transparency. All our associates are ETA-Certified Payment Professionals. Not only have they completed the rigorous certification, but each has taken an oath to complete regular continued education. And they vow to abide by the ETA’s Code of Conduct.
But, if you’re considering a merchant cash advance, we’d advise you to also consider all other options for a business loan as well. This is the only way to truly weigh your options and make the best decision for your business.
Ready to find out if a merchant cash advance is the right path for your business? Give us a call and let us help you make the right decision.