The Merchant Cash Advance is known to many as a description for a variety of small business financing options. These options are characterized by 24-month long payment terms rather known as short payment terms as well as regular terms of payments which are paid every business day. This differs from what the typical bank offer on the payment of their loans. However, when the Merchant Cash Advance concept was being developed, the idea was the provision of a lump sum of payment to small or large businesses in exchange for a certain percentage of the business’ future debit or credit card sales or both. The percentages were to be agreed upon by the financiers and the business owners.
An understanding of Merchant Cash Advance
There are basically a group of companies that are referred to as Merchant Advance Cash Companies. These companies work on the basic aim of fund provision to companies which are later expected to pay back in the form of business daily credit income which is obtained directly from the processors by the financiers at an agreed upon percentage in order to clear the debt. The payments are deducted from the company’s customers’ debit or credit cards on a daily basis. For these reasons, businesses do not refer to money from Merchant Advance Cash companies as loans but rather as a sale of a part of the company’s future credit or debit card or both sales.
Methods of repayment for Merchant Cash Advance
There are three main methods of payments that Merchant Cash Advance companies accept. The first one is known as split withholding. What happens in this method of payment is that, when the company is processing either or both debit cards or credit cards belonging to their customers, the sale is split between the company and the financier according to a percentage they agreed on. This payment method is the most common for this form of financing.
The other one is the trust bank account withholding also known as the “lock box.” Here, the company has to deposit all its credit card and debit card sales into a single bank account controlled by the financier. The financier then deducts their payment and forwards the rest to the business. This is less convenient for the businesses as they have to suffer a one-day delay between sending and receiving the money.
The third mode of repayment is the ACH withholding method. Here, when a sale occurs, the financiers receive the processing information of every single credit and or debit card used in the sale and deducts its payment portion directing from the customers’ checking accounts.
The upside to Merchant Cash Advance
Perhaps among the greatest benefits of using these forms of financiers is that the unconventionality of its structure also means that the amount of payment made to clear the debt can differ according to the amount and quality of sales the company makes. This means that during a low selling season, the amount given to the Merchant Cash Advance is also low hence does not cause constraints on the company making the payments.
The other advantage is that the Merchant Cash Advance pay more attention to the performance of the business which it is financing as opposed to the credit of the owner of the business. This is because the payment of the loan is directly linked to the performance of the company and its daily sales as opposed to the money made by the owner of the business.
Another upside is that Merchant Cash Advance is generally processed faster than regular loans. This allows the borrowers faster access to money at almost the exact time they need it.
The downside to Merchant Cash Advance
Because they do not operate like regular loaners of financiers like banks, the Merchant Cash Advance Companies are not limited by state laws on lending. Therefore, they do not submit to a regulated amount or percentage of interest rates allowing them to operate in a market that is by far largely unregulated and untamed. This disadvantages the companies that seek finance from these companies since their interest rates are high and vary depending on the stature of the company they are financing.
The growth of the Merchant Cash Advance industry
Over recent years, the Merchant Cash Advance Industry has been recognized as one of the fastest growing industries. The industry offers funding and financial aid amounting to a minimum of three billion dollars to small businesses annually. This industry hosts an annual conference known as the Broker Fairly where small businesses are educated and trained on the concept of Merchant Cash Advance. The conference is usually held in New York and allows attendees the chance to network with financiers as well as other businesses.