Merchant Cash Advance Blog

What You Didn't Know About Business Funding with Merchant Cash Advance

   Tuesday, 21 November 2017 10:07 PBC Blog

What You Didnt Know About Business Funding with Merchant Cash Advance

There are often times when a business will be in dire need of capital. Such situations could occur when a business franchise is seeking to expand, to embark on new lines of production, or even to purchase the machinery it needs to improve its production. There are also times when a business might just simply need a lump sum of money to get through hard times and getting business funding in the form of loans is often the only way out. But getting loans can be a very daunting task especially when traditional sources are explored. If this is the case—and it is—then businesses would do well to turn to other directions of if they must succeed.

There are quite a number of options apart from commercial bank loans which business owners can take advantage of in this present time. But one that has often proven to be of immense benefit to firms is merchant funding. However, some business owners have maintained skepticism towards merchant cash advance. They either do not consider it to be of equal standing with, if not a better option, to commercial bank loans. Of course, there are quite a number of reasons for this bias which shall be sufficiently dealt with. In the meantime, however, focus shall be on what exactly a merchant cash advance is, and how it can be exploited to finance business objectives.

What are merchant loans?

The first thing to know about merchant loans is that from a technical point of view they are not loans; that is, they are funds given to a business over which it has to pay interest as is the usual practice of banks. On the contrary, merchant cash advance, as a source of business funding, is a commercial transaction which involves a business obtaining a lump sum of money from the lending firm in exchange of a share of its future credit sales. At first, this might be a bit difficult to understand but as the discussion unfolds, it will become quite clear that the process of obtaining a cash advance is much simpler than it sounds.

For our own purposes lets us take the example of a restaurant seeking funds to open a new retail outlet. This is a good scenario since merchant loans are especially suited for businesses with high rates of credit sales as this would make it quite easy for the advance to be recovered over a short period of time. So the restaurant approaches the merchant advance firm seeking business funding. What then happens is that the lending firm asks to go through the records of the credit sales of the business to ascertain if the advance can be recouped easily. In most cases, only the records of the previous few months are needed and the final decision is almost always based on this.

How do merchant loan providers gain profit?

Since it has been stated that the lending companies do not give out cash with interest one might wonder how on earth they make a profit. In the actual sense, the companies usually multiply whatever amount it is they lend to businesses by a certain factor that is typically below 1.5 to arrive at the total amount the business is to pay back.  This is amount is deducted from the credit sales of the restaurant until the money is repaid.  It is a standard practice for the firm to stipulate that a certain percentage of the credit or debit card sale is used to offset the merchant business funding. This is percentage is usually chosen after considering the amount of the advance provided as well as the estimated revenue of the business. Of course, most merchant cash providers only cater for the short-term needs of businesses and are always looking to recoup their investments within a short period of time. Usually, the target period to recover an advance is one year or much less. So, it is with this in mind that the lending firm decides what fraction of daily or monthly credit sales, as the case may be, that will go into the repayment of the debt.

Are there flexible payment options with merchant loans?

As for how the debt is repaid, there are two options available to the business of repaying the merchant business funding loan. The first option requires that the percentage decided on is to determine what fraction of the sales goes to the lending company at the agreed interval. For this to take place arrangements are made with the credit card provider of the business In order for a fraction of the sales to be automatically remitted. The interval could be monthly, weekly, or even daily, depending on what has been agreed to by both parties. One implication of adopting this method of payment the time for the payment to be completed is quite flexible. If for instance it is estimated that the credit sales will be a certain amount per week and based on this it is expected that the entire advance will be redeemed in 12 weeks, it can be deduced that if the actual sales fall below or exceed this value, the time will automatically change.

It is often thought that this payment mode is preferable in that it allows payments to be in accordance with the state of affairs of the business. The better a business does, the more quickly the debt is repaid and vice versa. However, in cash advance business funding there is no reward for early payments as opposed to commercial bank loans where certain benefits obtain. In short, the other payment is very much like the first and a closer look will only reveal that they are both of the same effect except when actual sales differ markedly from estimates.

In the other method, a fixed sum is paid at the predetermined interval regardless of whether or not the credit sales are high or if they plummet. The fixed amount is computed using the percentage as in the previous method, but in this case, the amount arrived at based on the original estimate of the credit card sales becomes the final amount that is paid even when actual sales differ from the estimate. This method has the advantage of providing for fixed payment duration. While this might be more favorable to the business funding firm, it might place a considerable strain on the cash flow of the business especially if payments have to be made on a daily basis. In all, regardless of the method adopted, repaying merchant loans is a straightforward process.

Why is merchant cash the right option for you?

Of course, there is always the option of commercial bank loans. But it is often difficult for businesses to obtain loans from banks because of the rigorous process involved. Moreover, the chances of being turned down are quite high when compared with merchant cash advance. And this happens after a very long period of waiting. So in a nutshell, if one has an urgent need for business funding the best option is most likely a merchant cash advance.

In addition to delaying the issue of having a good credit score also comes up when seeking loans from banks. So, most firms spend a good amount of time trying to improve their scores. The good news, then, is that a good score is not required for a cash advance. Although the lending firm might perform some background credit checks, the decision whether or not to issue the advance is made without much regard the level of the score.

One other thing that poses a hindrance to securing loans is the inability for most businesses to provide the kind of collateral that banks normally require before providing business funding. It is especially significant that lending companies do not request collaterals before providing an advance. That being the case, there is no question of a personal loss for the business owners if the business is unable to redeem the advance and it is often the lending firm that is at a risk of losing its business funding investment if the business fails.

Some objections to merchant Loans

In spite of the significant highs of merchant loans, some object to it because of its cost relative to other sources like bank loans. While this objection might be valid, it does not take into cognizance the fact that the success attained with merchant loans more than compensates for its high cost as any business owner whose business has been saved by a timely cash advance can attest.

And although it is true that the annual percentage rate associated with merchant loans is high, this rate has nothing whatsoever to the actual monetary cost of the advance. Some are also of the opinion that, since business funding is so much easiear with merchant loans, it could lead a business into a debt trap. Of course, this argument is not sound; for it is the purpose of an advance to solve specific business problems which shouldn’t always arise. In all, merchant loans have proven a good, if not a better alternative to commercial bank loans.


We provide two highly accessible financing programs that can get your business the working capital it needs in days instead of months.

For a small business, obtaining a traditional loan today is a complex and difficult process. That’s where Premier Business Capital comes in. 

Merchant Cash AdvanceACH Loans 


© 2016 Premierbusinesscapital. All Rights Reserved.