Among business analysts, lenders and small business owners alike, there’s continued controversy over the value and potential risks of a little understood lending alternative called the merchant cash advance. While this quick capital option continues to be shrouded in negative speculation, an increasing number of business owners seem to be availing themselves of a merchant cash advance, and with good results. So just what is a merchant cash advance, and how did it get such a bad reputation?
Let’s break down the facts:
In a nutshell, A Merchant Cash Advance (MCA) can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.
Merchant cash advances are classified as commercial transactions, not loans. Here are the distinguishing characteristics of merchant cash advances:
No Fixed Terms. Providers estimate the term for repayment based on the business’ sales history. The customer is charged a set fee, referred to as a factor rate and there are no interest charges.
Cash Advances Are Unsecured. The provider does not receive any collateral or guarantees, accepting all risk of the client going out of business.
Minimal Documentation. Often, a client can simply provide six months of processing statements, two months of bank statements, a copy of a mortgage statement or property lease, and a driver’s license.
No Fees. There are no late fees or penalties attached to the product.
Fast Approval and Funding. Most cash advance providers can approve and fund an application in 2-7 days, LVRG can get you funded in less than 1.
Daily Repayment. This varies according to the volume of the merchant, and changes according to the business cycle. The provider receives a set percentage or amount of the merchant’s daily card settlement batch.
Simply put, for small businesses who need cash immediately and don’t qualify for a traditional loan, an MCA could be a lifesaver. Despite the controversy, here are a few reasons this lending alternative deserves a second chance:
Fast access to cash
Cash advance applications typically require less paperwork and have faster turnarounds than traditional loans. In fact, LVRG is able to transfer lump sum capital in as little as a day in some cases, which can be lifesaving for a business with an unexpected cash flow emergency.
A good option for bad credit
Merchant cash advances biggest advantage as a loan product is that it opens up a channel for business owners with bad credit to get liquid cash. Additionally, the customer’s credit score isn’t as important as their future sales projections, given that the provider is paid back through a percentage of daily credit card sales.”
Flexible return payment
With a traditional loan, the same minimum payment on principal and interest is due month to month, regardless of whether business is in a slump. This can be a big challenge for seasonal businesses that don’t have a regular cash flow. But because a merchant cash advance is repaid through a fixed percentage of daily sales, borrowers have the flexibility to repay more when sales volume is high and less during slower sales periods.
No collateral required
If an entrepreneur doesn’t have significant personal assets to leverage, traditional bank loans can be almost impossible to obtain. And even for business owners who do have significant home equity or other assets to be used for collateral, the risk that entails doesn’t always sit well. One benefit of the MCA model for borrowers is that no collateral is required, meaning if the business fails, the provider has little recourse to collect.
With all that said, it's imperative you understand that not all merchant cash advance lenders are created equal. There is no barrier to entry or regulation in the merchant cash advance industry, which is why anyone and everyone seems to be selling merchant cash advances these days. The reality is, most of the employees at merchant cash advance funding companies have no knowledge, background, education, or experience in finance, or business. Which leads to a very scary situation, as these people are offering highly specialized advice, without knowing what they're even talking about. So they essentially are providing advice to small business owners based upon their commission scale, not what's in the best interest of the business.
- Do you know what the level of education is needed to offer small business loans, merchant cash advances "MCA's" and other small business funding products? NONE
- Do you know how many certifications are required to offer financing advice? NONE
- Do you know how many courses are needed to work at a funding company? NONE
- Do you know how much regulation is behind the small business loan industry? NONE
A decade ago there were only about ten Merchant Cash Companies in existence. Today there are thousands. There is wide variation between the pricing and terms across MCA providers so it is very important to know what lenders are out there, and the fees attached. Furthermore, not all Merchant Cash Advance lenders are created equal and many are only interested in increasing their bottom line, not yours. So, it's imperative you choose wisely. LVRG is a team of the right people working with the right data getting you the right-sized funding for your business. At LVRG, we believe we are different from other lending firms. We never set out to be the biggest, but we do strive to be the best. Our deep sense of integrity, professionalism, and commitment to the spirit of entrepreneurialism propel our determination to provide assistance to small business owners in a challenging economic climate. Hope this helps… For more, feel free to get in touch!