A Guide to Merchant Cash Advances for Small & Medium Businesses

Merchant Cash Advance Guide for Small & Medium Sized Businesses
There was a time when securing a loan was, frankly, all too easy. Whether in the personal arena or the business world, banks were all too happy to lend out money, even to subprime applicants. In the wake of the 2008 financial disaster, lending times have changed. To a certain point, it’s easy to see why. Irresponsible lending was one of the cogs in the machine that eventually led to the financial meltdown. It seems only responsible, then, that banks should have adopted stricter policies when it came to lending, especially given how overexposed many of those same institutions were.

However, it’s possible that the pendulum has swung a little too far in the opposite direction. Since 2008, credit has tightened to the degree where it’s difficult even for well-qualified individuals to secure a loan. This credit tightening has not only hurt individuals, but also small- and medium-sized businesses. As engines of job growth during an economic recovery, it’s especially important that these businesses have access to liquid assets to ensure the health of the business and the job security of employees. While large businesses can generally rely on large cash reserves to fulfill these financial obligations, that isn’t the case with small- to medium-sized entities, so lending becomes a vital part of the business plan.

To fill the need created by this credit crunch, a number of novel lending practices have become quite popular with small- and medium-sized businesses. These emerging lending entities are incredibly useful to the small-business market, but each of them has their strengths and drawbacks. Perhaps among the most versatile is the merchant cash advance, which businesses can pay back through a small percentage of credit-card transactions.

Is merchant cash advance a loan? Well, not exactly. Because merchant cash advance information is now relatively easy to come by, it’s always up to the business owner to know what projects merit taking on additional debt and when it’s best to avoid that. In the end, lending is designed to increase the strength of the business, and that’s up to the owner.

Turn Back the Dials

Prior to 2008, the financial markets were experiencing unprecedented and unchecked growth. New financial products and excessive lending, especially in the fields of mortgage lending and retail property, primarily drove this growth. When the 2008 financial crisis began, a combination of bank malfeasance and the unpopularity of the $750 billion TARP program lead to a public relations nightmare for banks – and, arguably, led to an existential crisis of conscience. In the wake of this crisis, banks have sought to resuscitate their image and rediscover their focus by re-establishing stringent oversight of lending programs and initiatives.

No only did this seem like a good idea at the time, but it was also a signal to panicked markets that a catastrophe such as this one would not happen again. It was a move designed to reassert credibility of lending, and, in many ways, it worked. However, this strategy was not without flaws, especially when it came to unintended consequences for small- and medium-sized businesses.

Without the advantage of having large cash reserves or pre-established lines of credit, these businesses suddenly found it very difficult to secure loans in a timely fashion – if at all. Even businesses with exceptional credit and sound accounting found themselves turned down by lenders due to constantly shifting requirements and variable rules tied to arbitrary business size definitions. In other words, the pendulum had swung too far in the opposite direction: Medium- and small-sized businesses to this day continue to have too much difficulty securing the necessary financing to keep their businesses running.

The fact of the matter is that lending is a vital source of cash during the expansion of any businesses, or in handling many of the surprising road bumps that come with the operation of any enterprise. An infusion of cash may be key to a business expanding its inventory or moving to a more competitive location or keeping its employees on the payroll during a rough month. In other words, lending is not a petty concern and should not be dismissed as somehow irresponsible or the sign of a weak business plan. Lending is a vital component to an agile, thriving, and above all, healthy business.

Banks Drop the Ball, Others Pick it Up

Even though banks have, in a way, dropped the ball on the lending question, that doesn’t mean small- and medium-sized businesses are completely without options. After all, nothing drives innovation like a sharply motivated survival instinct.So a few novel lending options have gained popularity since the financial crisis of 2008.

Peer to peer lending practices
Perhaps the most social of these new lending options is something called peer-to-peer lending. In much the same way that Kickstarter helps creative projects meet financing and budget goals by crowdsourcing small denominations of money from a large number of backers, peer-to-peer lending leverages a small amount of capital from a large number of lenders.

With Kickstarter projects, in return for financial backing, those who donate money are rewarded with all sorts of incentives: T-shirts, autographs, and so on. Peer-to-peer lending is a roughly equivalent enterprise. Lenders offer smaller loans that accrue their power from their quantity rather than their quality. This means peer-to-peer lending takes a considerable investment of time, which is one of the drawbacks of this method. Peer-to-peer lending has a lot going for it, but efficiency is not one of its strengths. That said, for the innovative entrepreneur with a knack for public interaction, peer-to-peer lending can be a great way to gather the necessary capital.

Microloan lending practices
Frustrated by larger lending institutions, some businesses may turn to a solution called microloans, a financial product created by institutions which specialize in lending small amounts of money to accomplish broader objectives. Microlenders focus on lending small amounts of cash – in the range of $5,000 to $10,000, for example – depending on the institution. (It’s worth noting that some microlenders focus on even smaller denominations when it comes to loans, sometimes in the hundreds of dollars.)

Often, microlenders are nonprofit groups or, at the very least, interested in accomplishing broader social goals, such as assisting women or minorities with gaining a foothold in entrepreneurial environments. Microloans certainly have their strengths, especially in their ease of release, but there are also some drawbacks to keep in mind. First of all, microlenders are, by their nature, limited to smaller quantities, so if your business requires a lifeline of $100,000, microloans won’t quite cut it. That said, there are certain situations where microlending can be a great option.

For the vast majority of small- and medium-sized businesses, however, lending options need to be expedient, flexible, and affordable.

A Short Merchant Cash Advance Guide

Of all the novel lending practices to rise from the ashes of the 2008 financial crisis, there is only one that realistically meets those three criteria: expedient, flexible, and affordable. However, even this is not without qualifiers. First, let’s get into the nuts and bolts of this lending method, known as a merchant cash advance. So, is merchant cash advance a loan? Technically an unsecured loan, merchant cash advances are designed to meet the needs, primarily, of merchants who have healthy credit card sales.

Is Merchant Cash Advance a Loan?

Some wonder, is a merchant cash advance legal? Despite some relatively high interest rates, yes, they are. To be sure, merchant cash advance products target primarily merchants – it’s in the name, after all. The reason for this specificity comes down to the mechanism of repayment: the credit card machine. Whatever the amount which has been advanced to the merchant, the loan is repaid via percentage subtractions from each and every credit card transaction. This is actually one thing that makes merchant cash advances quite appealing, as merchants never feel the crunch of having to pay off a large lump sum every month.

By paying back the sum in 15 percent increments on credit card transactions, the merchant actually feels it less. To be sure, the interest rate on merchant cash advances can be relatively high – sometimes as much as 15 to 20 percent. This is significantly higher than the 8 to 10 percent rate you might see at a bank, but the repayment scheme dulls the blow of what might otherwise seem like a stiff bill.

In terms of additional merchant cash advance benefits, that type of interest rate might definitely be worth it.Cash advances can be ready in as little as 48 hours Often, because merchant cash advances are unsecured – that is, it’s not like a loan where you offer collateral and the bank files paperwork – cash advances can be ready in as little as 48 hours. This gives small- and medium-business owners a considerable amount of flexibility and responsiveness when requesting their funds, because usually when merchants come across a bump in the road, that bump pops up rather unexpectedly.

Merchant cash advances are also not opposed to lending the larger amounts of money that small and medium-sized businesses sometimes need. Because of the nature of these lending businesses, merchant cash advances can come in denominations including rather substantial sums such as $80,000 to 100,000. Of course, there is due diligence on the part of most lenders, but because of the unique repayment system, this process is not as strict as it might be at a bank.

Merchant cash advance benefits include flexibility, as well as expediency and efficiency. These characteristics make this particular lending option considerably appealing to small- and medium-sized businesses, especially given that lending has become so problematic in the traditional bank-lending paradigm. That said, as with any lending option, merchant cash advances are not without inherent risks and drawbacks. It’s up to the business owner to delve into some of those drawbacks.

Is Merchant Cash Advance a Safe Option?

As with any lending option, there are some things you can do to protect yourself from especially predatory lending. First, avoid lenders that make you pay exorbitant fees. Most lenders will collect their share of profits from interest. If lenders also rely on fees, especially if there are a lot of them, it might be a good indication that this particular lender isn’t in the best shape. You can also look at it this way: since charging multiple fees is not best practice for merchant cash advance lenders, you’re very likely to be able to find a deal somewhere else.

Of course, you will have to do your part to make sure that this particular option is good for you. Banks, especially big banks, assume that you have no idea what your finances look like or what you can afford, so they work to ensure the loan in question isn’t irresponsible. Merchant cash advance lenders, by their nature, don’t really work like that. In fact, it’s the opposite. This means that the business owner is responsible for establishing the responsibility of the cash advance. In other words, the business owner has to make sure the loan – interest included – will pay off.
Merchant cash advance information
In many cases, this isn’t terribly hard to figure out, especially if it comes down to the life or death of the business. It’s not uncommon for a business to have a bad month, or a bad stretch of months, before finally hitting prosperity. This is especially true in the early months of operation, when investors are maxed out (or aren’t interested in hearing that the business isn’t taking off immediately), and you’re unwilling to put extra money in. There’s no merchant cash advance guide for this step, so much is up to the business owner.

The question of a merchant cash advance as a safe option gets a little more complex when it comes to your business and its expansion and inventory. Sometimes it makes sense to stock up on inventory before, say, a busy Christmas shopping season. Sometimes it makes sense to move to a new, more competitive location. These are both options that will help grow the business – but only your books will tell you whether these expansions might be worth the interest you’ll be charged, or whether you’ll be able to comfortably afford repaying the cash advance. In many cases, the numbers work out, but you should always be ready to admit when they don’t. In fact, it’s generally a good idea to look at your past six months of sales to ensure that you’ll be able to comfortably repay the cash advance.

Merchant Cash Advance Information

When searching for specific merchant cash advance information on specific lenders, merchants should be acutely aware of the power of word-of-mouth, so it shouldn’t be terribly difficult to find a lending institution with a good reputation. Indeed, it’s never a bad idea to check with the Better Business Bureau, as most lenders who engage in honorable practices will have a great reputation. You should be able to determine if a particular lender answers that question of is whether merchant cash advance is a safe option.

Sometimes your business just needs cash right now. Banks can take months to process loan requests, and even then there’s no guarantee that things will work out in your favor. Maxing out your credit might not get you the results you want, and you’ll be left with a crippling payment at the end of every month (not to mention the damage this might do to your credit report). In fact, if your business fails, you still might be stuck with the credit card debt. Merchant cash advance funding gives you money in very little time; often in as little as 48 hours. It’s true, we’ve touched this point several times, but it’s difficult to emphasize just how key this can be to a business that suddenly finds itself with an opportunity it can’t pass up or an obstacle it has to deal with quickly.

Merchant Cash Advance Benefits and Merchant Cash Advance Funding

Benefits of merchant cash advance funding
The speed with which merchant cash advances are distributed allows business owners to concentrate on more important aspects of running the business. It also allows those funds to be used in an agile way, in case the needs of the business shift. This allows a small- or medium-sized business owner to put the cash advance to its best possible use in the eyes of that owner. So, if the business needs money right now and doesn’t have other resources, a merchant cash advance is a great option.

There’s also the amount of capital a merchant cash advance can suddenly invest into a business. So, is a merchant cash advance a loan? For this purpose, it doesn’t really matter. As mentioned before, the amount of money raised for these purposes can rival traditional bank loans. This allows the merchant access to a substantial amount of cash when it is needed, giving the business itself flexibility in terms of pursuing profitable ventures. Sure, every little bit of lending helps, and maybe that $1,000 loan from a microlender will do some good, but it can’t keep a business afloat during a rocky spell.

Merchant cash advance funding, because of the quantities involved, has the potential to do just that. It’s not a long-term solution the way that a good business plan is, but these cash advances do allow merchants to weather a storm or invest in the future without having to alarm investors unnecessarily by asking for another infusion of capital (itself a complex undertaking).

Is Merchant Cash Advance Legal?

Because they seem so efficient, many may be wondering, is merchant cash advance legal? To answer this simply: yes. Merchant cash advances are designed to be a simple solution. This simplicity continues in the way that the merchant cash advance is paid back to the lender. To put it succinctly: bills are a drag. There’s something about human psychology that makes bills a larger burden than, say, the cup of coffee you buy every day, even though your monthly Internet bill and your monthly caffeine in the end cost you the same amount of money. That Internet bill seems expensive, but the coffee does not.

Merchant cash advances are designed to feel like a cup of coffee. Merchants repay the amount with each swipe of the credit card, and it may take several years, but there will never be that monthly bill hanging over your head. Of course, the rate of repayment depends on the overall success of your business. If your business is more successful (that is, processes more credit card transactions), you will repay the loan at a more rapid rate. Likewise, if your business slows down, you will simply repay the loan at a slower rate.

This is strikingly different from a standard bank loan, where this type of flexibility would require significant renegotiating with the bank. With a merchant cash advance, this flexibility is baked into the very concept, so your business can always count on flexibility in proportion to the health and success of your business.

This unique repayment method means that even small businesses can quickly qualify for a significant merchant cash advance loan. Banks are generally hesitant to lend to small businesses, for a wide variety of reasons, many of which can be traced back to slippery definitions of a small business. Whether that business is run by a sole entrepreneur or employs 10 to 15 people will have a drastic impact on the way the bank treats that business, especially regarding the amount of income and profit reported.

To be as blunt as possible, when it comes to lending, the deck is very much stacked against small businesses, no matter how good the books may look. Banks are, by nature, risk averse and small businesses can often be big risks. A merchant cash advance loan can give those small businesses access to needed capital with a small turnaround and reasonable repayment options. That small businesses have access to this tool certainly fills a large need in the economy, and small businesses are not unwise to take advantage of it.

Merchant Cash Advance Explained

Cash advance guide
There’s no getting around the fact that if you’re a merchant and you need a concrete solution to a financial issue, a merchant cash advance for small businesses is a feasible, often desirable, option. Of course, not all merchant cash advance lenders are created equal. It’s definitely worth doing some research and determining which lenders might be in a position to best help your business needs. For example, Native Merchant Services is a Native-owned processing company, which means that it is not required to pay federal taxes. Native Merchant Services can pass these savings on to the merchant, which is good for everyone – the processing company gains an advantage that makes it more competitive, the merchant saves a bit of cash, and everyone’s business ends up a little bit healthier.

Small- and medium-sized businesses are, after all, the engines of the economy, responsible for large amounts of economic prosperity and employment growth. In other words, the health of the small- and medium-sized business market is key to the health of the American economy. Merchant cash advances for startup businesses, along with other lending options, give those small businesses a vital tool to draw on when the chips are down or when you’re about to hit pay dirt. By saving merchants on time, money, and stress, merchant cash advances let entrepreneurs worry about running a business instead of repaying a loan.

If you’re looking for a lifeline or a competitive edge, a merchant cash advance for small businesses through a processing company such as Native Merchant Services is an option you can’t afford to ignore. Banks will likely turn you down or, at the very least, move far too slowly. Native Merchant Services will be there when you need it and can help your business thrive, as well as provide you with a personalized merchant cash advance guide. Get started on the solution and contact us today.

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