Merchant cash advances have become quite popular among small businesses nationwide. While it is not a new concept, it has grown in popularity due to the recent downturn in the global economy. With banks not lending and with the stricter requirements to qualify for SBA l oans, there has been an increase in the need for alternative financing options like merchant cash advance. For the small business owner having difficulties obtaining a business loan, merchant cash advance continues to be a great option.
Merchant cash advance (MCA) presents little risk to the grantor; hence the qualification criteria are somewhat lower than those of traditional bank loans. In underwriting them, the general consensus is that past performance is indicative of future results. While not always accurate, a company’s merchant processing statement over a period in the past would typically determine how much in revenues it would generate in the future.
The MCA industry strictly refers to the program as a purchase of receivables and NOT a loan. A business owner would sell its future credit card receivables at a discounted amount today and pay it back over time with daily deductions from his merchant processing account.
For example, Business Owner Bob, a retailer wants to expand his business by buying additional inventory that he projects would double revenues for the rest of the year. He needs $15,000 to get started. Bob has been to his local bank and another with no luck. XYZ Funding Group has offered to work with him. He currently averages about $12,000 per month in credit/debit card processing. XYZ buys Bob’s credit card receivables for $16,000 and gives him 9 months to pay it back. A fixed percentage will be held from his daily batch until the amount agreed upon has been paid in full.
Most funding sources would require the following to offer a conditional approval:
- 3 months business bank statements
- 6 months merchant processing statements
A quick review of these documents by an experienced analyst could give a merchant an idea of what to expect. Typically, businesses with 6 months time-in-business qualify for a merchant cash advance, as long as they process a minimum of $5,000 per month (**funding sources usually have different guidelines). The longer the length of time in business, the lesser the risk associated with the company’s profile, and the more preferable it is to the funding source.
- Increases cash flow
- No restriction on use of funds
- Fast turnaround (as quick as 48 hours)
- Subpar credit profiles are usually welcome
- Doesn’t report on personal credit
- Flexible payback options
- Build business credit
It is important that a business owner only take on what he can handle, as it is possible to get carried away. Also known as business cash advance, it is one of several alternative financing options available. It is wise to discuss financing options with experts that offer multiple programs.