An economic downturn and lagging sales have caused commercial lending to come to a virtual standstill, even for well-qualified applicants. Many small to medium sized businesses have turned to merchant cash advances in order to make ends meet.
When consumer spending dwindles, the effects can be devastating on businesses that operate on a thin margin. Cash flow shortages, whether fleeting or long term, can translate into difficulty covering everything from basic operating costs to funding business expansion and growth. And in a tight lending environment, many traditional lenders are reluctant to finance even the most profitable business endeavors.
What is a Merchant Cash Advance?
Fortunately, there are a few alternative lending solutions that may offer salvation for those in need of a quick working capital infusion. A merchant cash advance is a payment made to a business in exchange for a pre-determined portion of future credit card sales. The balance is usually deducted on a monthly basis directly from the credit card processor until the balance has been paid.
What are the benefits?
The main benefit of taking out a merchant cash advance is the lack of financials needed to qualify. Most businesses that are not able to obtain financing from traditional lenders can easily qualify for a merchant cash advance, provided they process a given amount of sales per month. A business can often obtain funding in less than 72 hours, with little to no paperwork necessary. As repayment of the advance is strictly based on credit card sales, cash and other income is not factored into your payment obligation schedule.
What are the drawbacks?
Depending on the provider, a merchant cash advance can be expensive when compared with the interest rates on a traditional bank loan. As merchant cash advances are not considered loans, they are not subject to the regulations that govern interest rates. Consequentially, some unsavory companies offer merchant cash advances with up to 100% effective interest. Most respectable providers, however, offer much more favorable terms to their clients and have a genuine interest in seeing them thrive.
As a whole, the way merchant cash advances are structured can offer many advantages to small and medium sized businesses over conventional bank loans. Since payments are based on a percentage of credit card sales, seasonal fluctuations in sales volumes are easier to manage for business owners, giving them greater flexibility with which to manage their cash flow. The ease of application and approval, coupled with favorable repayment schedules and no collateral requirements, make merchant cash advances a viable source of reliable funding for many businesses today.
Roger Snyder is a commercial lending veteran and has been helping small businesses secure credit for over 25 years. He is currently the managing director of GrowCo Factoring & Financial, an invoice factoring company with offices in Houston, TX and New Haven, Connecticut. For more information on merchant cash advances and other lending solutions visit http://www.fastinvoicefactoring.com.
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