Merchant Cash Advance Blog

Merchant Cash Advance and the Quest for Alternative Business Finance

   Thursday, 04 January 2018 11:48 PBC Blog

Merchant Cash Advance and the Quest for Alternative Business Finance

Everyone in business knows how challenging it is for a business to generate and maintain working capital. Beyond that, businesses—especially the small ones—are always looking for opportunities to grow and expand. But insofar as the growth and expansion of the small business are dependent on the number of funds at its disposal, there is always a tendency for growth to be halted. When it comes to the issue of getting adequate business financing, firms are gradually looking away from traditional lending sources and shifting their focus to alternative business finance. Before we take a look on what alternative lenders offer and what the best alternative lending option is, we shall look at the issue of working capital and how it impacts the success, or failure of a business.

Speaking from a technical perspective, working capital is a term that denotes the amount by which the current assets of a business exceeds its current liabilities. Of course, this way of viewing working capital is bound to appear somewhat confusing to the average person who is accustomed to seeing working capital strictly in terms of cash that is available to a business to maintain operations. However, an understanding of the concept of working cycle is necessary for explaining working capital. The working cycle is used to evaluate the accounts receivables, inventory and account payables. The account receivables are measured by the number of days that is needed to collect an account, all things being equal, while the inventory is evaluated based on the number of days it will take to turn over the sale of a particular product. Since most small businesses cannot finance their working cycle with just the accounts payable which are evaluated by the number of days it takes to get a supplier invoice, small business often resorts to business loans and sometimes alternative business finance. But apart for the sake of working capital, a business could also seek financial instance to purchase a new piece of equipment, buy additional inventory and even to offset pre existing debt.

Why are small businesses turning to alternative business finance?

The first point of call prior to our present time for small businesses in need of cash used to be commercial banks. But for some time—especially since the economic depression of 2008—banks have generally cut down lending to small businesses by as much as 20 percent. The issue of depression is one way to look at the problem. For indeed there had never been a time when banks and other traditional lenders granted loans easily to small businesses—something which alternative business finance providers are known for. Part of the reason why small businesses find it difficult to secure loans from banks is that, in most cases, they are unable to meet the hitherto stringent requirements required by the banks.
Commercial banks generally look at the credit score of a business before deciding on whether it is to be granted credit or not. Small businesses often have poor credit scores and this automatically makes the affected business ineligible for bank loans. In some other instances even when the business has met all other criteria for the loan—good cash flow, excellent business plan, etc. - the final obstacle would lie in providing the needed collateral. Not much can be said on this as everyone knows that small businesses are more often than not unable to produce the collateral. Alternative business finance has thus become a viable option for small business and we shall take a brief look at some of these sources before proceeding to discuss merchant cash advance which happens to be a most popular choice among small business owners.


Read More: Loans for Small Business Owners Through Merchant Cash Advance

Trade Credit and Equity Financing

One of the top sources of alternative business finance for small businesses is equity financing. Equity financing is suited for businesses that have been in operation for only a few years. It is the best option for a business that has not been turning profit in its first few years of operation. Being that equity funds are meant for short-term financing, they can be obtained from the sale of personal assets, or from friends or family. Equity funding cannot be expected to meet the short-term financing needs of a business at all times since obtaining funds from friends or family cannot be guaranteed. After all, small businesses might often require finding when emergency situations such as equipment failure come up. In such situations getting an investor, for instance, to provide financing might not be fruitful and the business is left stranded. One other source of alternative business finance is trade credit. Obtaining business funding from trade creditors might be considered a good option only when a business has had a smooth relationship with its trade creditor in the past. What trade creditors do is to help small businesses fulfill large orders. This kind of funding is not versatile as it cannot be used to purchase a piece of equipment nor can be used to carry out certain business activities.

Business Line of Credit and Invoice Factoring

Invoice factoring is one other source from which small businesses can obtain alternative business finance. The way it works is quite uncomplicated: when a business has an order, a firm called a factoring firm purchases the account receivables of the business and afterward proceed to manage the order. This is the sort of financing that is often adopted by startups as they are often not eligible to receive loans and other forms of assistance from traditional sources. For instance, most banks would usually require a business to have been in operation for at least two years before it can be eligible to receive loans. However, there are some merchant cash advance firms that offer alternative business finance to firms which have been in operation for at least 3 months. A business line of credit is another option that is quite popular among the small business folks. A Business line of credit is open to small businesses that are well capitalized as well as those that are able to provide the required collateral. And these are the reasons that make a line of credit not exactly suitable for business that are struggling and which cannot provide collateral.


Merchant cash advance as the best option for small businesses in need of quick cash One major source of alternative business finance, which is not plagued with the issues of collateral security and good credit scores as in the previous sources we have discussed is a merchant cash advance. A merchant cash advance is an unsecured financial transaction between a business and merchant cash advance provider that is not governed by laws that apply to conventional loan transactions. In a merchant cash advance transaction, the business offers to sell its future receivables at a discounted price to the merchant provider in exchange for a lump sum of cash which it is given almost immediately. Because of this alternative business finance agreement is structured, it is not considered to be a loan. First, as a defining property, a merchant cash advance does not attract interest payments, at least in the traditional sense of the word. And it is unsecured. This means that a merchant which obtains a cash advance provides no personal guarantee that the loan, so to speak, will be repaid at some specific time. So if the business should fall on hard times, or for some other reasons it is unable to pay back the advance, the merchant cash advance provider suffers a complete loss.


Read More: Where to find the best loan companies in 2017?

What are the General Requirements for Obtaining a Merchant Cash Advance and What does it entail?

Before a business is deemed eligible for a merchant cash advance, it must meet certain requirements which are, however, not as difficult as those of commercial banks. The first thing that merchant cash advance providers usually consider is whether or not the business in question generates enough credit sales that would enable it to easily repay the cash advance. This is very important since the business provides no guarantee in the first place. Merchant cash providers, as a minimum criterion, often require that a business should be generating nothing less than $5000 a month. To receive alternative business finance from merchant vendors, the business must also accept credit card payments such as Visa and MasterCard. In addition, MCA providers would require that the business has a physical location and as such online businesses are generally not eligible for an advance. As for the amount a merchant can borrow, merchant cash providers allow businesses to borrow from 50% to 250% of their monthly receivables. The merchant is then made to pay back the advance which must have been multiplied by a certain factor, by remitting a portion or percentage of its daily credit sales to the merchant vendor, until the advance has been fully repaid.


When it comes to alternative business finance, merchant cash advance stands out because of the speed with which it can be obtained—often less than a week. In addition, quite minimal documentation is required in order for an application for a cash advance to be processed. Moreover, there is no risk of personal loss to the business. But in spite of all this, some still object to merchant cash advance because of its relatively higher cost. While this claim cannot be totally dismissed, small business owners are better aware of how it is that the benefits that come from MCA outweigh the said cost. In all, the merchant cash advance industry is expanding and more and more businesses are taking advance of it.


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. 

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