Merchants with little to no credit often have difficulty obtaining financing through traditional lenders such as banks, credit unions, and credit cards. Fortunately, these merchants have another option: merchant cash advances. They are often the best alternative for a lot of businesses because they provide capital that wouldn’t otherwise be available through traditional funding sources. With merchant cash advances these businesses can get the financing they need in order to meet their needs and goals without it affecting their business. The most difficult decision for a business regarding merchant cash advances is choosing the right provider.
The first step in choosing a provider is for the business to research all of its available options to insure that the potential providers are in good standing and don’t have any questionable practices. However, the best option is to start with a lender or provider in which the business already has a relationship with. Regardless of the provider the business chooses the majority of merchant cash advances are convenient, fast, and effective. Most are also in strong demand because of the increasingly conservative lending practices of traditional lenders. Merchant cash advances are considered to be a type of factoring product because a business sells a portion of its future credit and debit card sales in exchange for a pre-determined amount of money.
The provider typically purchases these from the business at a discount in exchange for a large lump-sum cash payment for the business in return. Typically the provider, then receives a percentage of the business daily credit and debit card sales until the money is fully repaid. Typically merchant cash advance providers require less documentation than other lending institutions. Most providers require merchants to have minimum monthly credit and debit card sales of $5,000, be in good standing with their landlord or mortgage provider, and no unresolved bankruptcies and typically the only documentation required for approval is the processing statements, bank statements, and a copy of the lease or mortgage statement.
With split funding the merchant authorizes its provider to debit the agreed upon percentage of the merchant’s daily credit and debit card sales to the provider’s account and the remaining funds to the merchant account. Split funding is the preferred repayment method because it takes less time and is less risky. It’s the most convenient option for merchants because it’s easier for the merchant to manage its payback activity.
With an escrow account daily settlement amounts are deposited by the merchant and the provider debits the agreed upon percentage of the escrow account as an Automated Clearing House (ACH) transaction. Thereafter, the remaining funds are transferred to the merchant account. This typically takes about a day for the merchant to receive its portion of the funds. This gives the merchant less control over its funds because a third party has access to all the funds in order to debit the amount owed prior to being released to the merchant.
With direct debit the merchant cash advance provider directly debits its daily payment—based on the agreed-upon percentage—from the merchant’s bank account through ACH. This too takes control to from the merchant and unfortunately the ACH debits frequently cause merchants to overdraft. Merchants must be very careful when choosing a provider and look for a fair price. Merchants should consider eight key factors when choosing a provider to insure they are getting the best possible rates and services.
1.) Businesses should look at merchant cash advance providers that they have an established relationship with prior to looking at any other providers to see if they meet the criteria that the business is looking for.
2.) By using a provider that the business already has a relationship with it will streamline the application process because the provider will already have a majority of the documentation needed for the application. The borrower will just simply need to provide a couple of month’s bank statements, a copy of the businesses lease or mortgage, and some type of identifying documentation.
3.) Businesses should look for providers that have flexible and efficient approval standards. A good provider will have a higher approval rate than others in the industry.
4.) Businesses should look for providers who fund businesses within only a few days. A good provider will supply funding within three to five business days.
5.) Businesses should look for providers that use the split funding repayment method because not only is it quicker it’s not as risky.
6.) Businesses should look for providers that allows repayment to change as their incoming fund fluctuate so that repayment is related to the performance of the business instead of a fixed rate.
7.) Business should look for a provider that doesn’t have a set limit to program length, but instead bases repayment on sales volume. Otherwise, the business could be faced with a balloon payment at the end of the loan.
8.) Businesses should choose a provider who has been in business for a long time and has a good reputation for working with businesses.