What is a Merchant Cash Advance?
Business owners know that need creates a market when supply is down. They also find that, when they need quick access to cash capital, they now encounter more restrictive lending rules. A new merchant cash advance industry is stepping up to fill that need.
In a merchant cash advance, a merchant gets a lump sum cash payment in trade for a percentage of future debit or credit card profits. Restaurants, retail stores, and service providers who may have poor credit experience and little collateral, but who have strong credit-card sales are ideal candidates for a merchant cash advance. However, the most needy prospects may be those new in business, and they need to educate themselves about how the merchant cash advance works.
How it works
The provider collects a percentage of the daily credit card receipts directly from the card swipe terminal. The daily collection continues until the advance is repaid.
• ACH: The cash advance company receives its payment through automated clearing house (ACH) transfer from the merchants’ checking account.
• Trust Bank Account: The merchant deposits all credit card sales into a lock box or trust bank account maintained by the advance company. Then, the agreed upon percentage transfers through ACH or electronic funds transfer (EFT).
• Split Funding: The credit card processor splits the credit card sales automatically between the merchant and the finance company. Parties to such arrangements prefer this split because it is seamless.
1. Because the merchant’s payments fluctuate as a function of sales, this allows the merchant more flexibility to manage cash flow.
2. Cash advances are processed much faster than conventional loans putting capital in the hands of the merchant sooner.
3. Cast advance providers pay more attention to the merchant’s sales performance than to the business owner’s credit history.
4. The merchant pays less during slower months and usually repays the advance within 12 to 24 months.
5. There are neither due dates nor late fees.
Because the money is an advance on the purchase of future income, the merchant cash advance is not deemed to be a loan. And, that puts the process outside of banking regulations, which presents some risk of abuse by lenders that concerns some financial experts.
As with any business financial decision, a business should opt for the merchant cash advance after fully informed research. In some circumstances it is the best and only choice, but any decision affecting cash flow should be taken with consideration and good advice. As always if you have questions about cash advance programs or any of our services please inquire with us.