How a Merchant Cash Advance Works!
America is built upon the strength of the entrepreneur and small business. The new American dream includes becoming our own boss, but this isn’t easy for everyone to achieve. In order for any business to grow, whether it is big or small, it will need fresh capital from time to time to invest in advancements and repairs. The economic recession that has struck the world since late 2007 has hit the credit industry particularly hard, which means businesses have been struck hard as well as lenders are less eager to loan out money. Small businesses face an even tougher task in obtaining loans because there is less faith in their ability to repay debts. As such, a new industry has emerged to help these businesses by providing merchant cash advances.
A merchant cash advance is the same principle as a cash advance an individual might seek. Small businesses that are struggling to find other forms of credit can seek out a merchant cash advance to help infuse capital into their company in order to spur on growth. However, the manner in which a merchant cash advance is repaid differs greatly from a cash advance that individuals seek out.
Merchant cash advance providers are providing a lump sum of money to a small business that is to be invested in the company to help keep it on its feet and grow in the future. Instead of simply repaying the money to a lender, as with a loan, the borrower instead must agree to provide the lender with a share of future sales from the business. Merchant cash advance lenders typically target the following types of businesses:
- Retail
- Restaurant
- Service industry
These companies are targeted by merchant cash advance providers because they tend to have strong credit card sales but lack the ability to secure other forms of financing through loans and lines of credit. Reasons behind their inability to secure credit differ, but the most common reasons are:
- Lack of credit history
- Poor credit history
- Little or no collateral
Merchant cash advances are not loans and lenders within the industry go to great lengths to ensure that borrowers are aware of this. Instead of meeting fixed repayment schedules that typically accompany loans, businesses that make use of a merchant cash advance are agreeing to provide a percentage of future sales to their lender until the debt is repaid. This often takes up to a year for companies to repay, unlike individual cash advances that are often repaid in under a month.
Because merchant cash advances are not loans, lenders in the industry do not need to adhere to the laws that regulate lenders and keep interest rates in check. As a result, it is possible for small businesses to face interest rates that can range from 30% to upwards of 200%. Before considering a merchant cash advance, small business owners should carefully weigh the cost of doing so against the rates and repayment schedules of other small business loans or a line of credit.
The merchant cash advance industry has increased dramatically in the last two to three years in particular. The industry, which is but a decade old, has seen an increase in the number of lenders since late 2007 from just a handful to over 50 different lenders. The tightened credit environment that was created by the global recession has led to the rise in demand for merchant cash advances.
Given the youth of the industry, it remains largely unregulated by the government. In order to protect themselves, merchant lenders are taking steps to establish industry guidelines to try and avoid a harsh crackdown by regulators.