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An overview of Merchant Financing and how it works

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An overview of Merchant Financing and how it works

IA Merchant Financing or Financing for Merchant is a blanket term denoting financing provided to a business establishment. It is also known as merchant cash advances which broadly refers to any type of financing that requires repayment against the borrowing through a credit card processing system. This type of financing option is sought to cover costs related to business, make investments and survive your business.


Is Merchant Financing purpose-specific funding?

Most lenders mandate Merchant Financing purpose-specific funding for the businesses. For example, the funding must be used to buy inventory, upgrade a business facility, and so on. Therefore, if the purpose of the Merchant Financing is something else other than its prime goal, then your lender will deem such deviation as your contumacy to the contract’s terms.


However, there are no specific restrictions imposed on how you use Merchant Financing. You can use the financing to cover short-term business losses, buy equipment, pay for ad campaigns, implement cutting-edge technology in business, etc.


Is collateral required to secure the Merchant Financing?

Merchant Financing is not like a traditional bank loan mandating borrowers to pledge collateral. Various lenders offer unsecured Merchant Financing that rules out pledging your business or personal assets as collateral to your lender. Moreover, you don’t have to suffer the time-consuming collateral valuation process to get Merchant Financing.


Will the cost of borrowing go up if you delay the scheduled repayment against Merchant Financing?

Consider Merchant Financing a paycheck advance that involves a calculation of a small portion of your daily credit/debit card sales, at the end of each business day. The amount calculated is withdrawn automatically and applied against the funding lent. This enables you to avoid paying a higher total cost of borrowing, even if you prolong the repayment against the financing you have borrowed. The total cost here stays fixed.


How does Merchant Financing work?

The implicit upside of borrowing Merchant Financing is that approval is faster than conventional loans. Once your application is approved, the lump-sum amount is credited to your business account within a few days. Documents to be submitted in this context are proof of your identity, bank and credit card processing statements, and business tax returns.


You will get a maximum of $200,000 merchant funding, to be repaid in a short tenure of 18 months or less. The repayment involves subtracting a certain percentage of sales daily. This eliminates the daily quota from being counted in cash or check sales. You can also execute repayment out of your business bank account through ACH payments.


Remember, there is fluctuating repayment cycle in Merchant Financing. For instance, it will go up when your business is good, and vice versa. Moreover, if your credit card transactions are a solid $0 on any other day, the repayment toward financing is zero.


Key points to secure Merchant Financing

  • A credential stating your business has been running for at least a year.
  • A document showing a minimum credit score of 500
  • Proof of annual business revenue around $50,000
  • Credit card processing statements
  • Business tax returns
  • Bank statements
  • Driver’s license
  • Voided business check

The benefits of Merchant Financing

  • With a low barrier for approval, Merchant Financing is a viable option for business companies to get quick cash.
  • The quick and easy application process
  • No collateral requirement
  • Use the funds as you see fit
  • Repay corresponding to your sales volumes
  • A good option for businesses with fluctuating sales or who depend on seasonal sales.

The disadvantages of Merchant Financing

  • More expensive than other types of financing options available in the market. The cost is based on factor rates that are different from interest rates and with specific repayment periods.
  • Creates cash flow problems, as a lion’s share of your future sales goes down paying off the upfront and related costs.
  • No benefit of interest savings from early repayment. Unlike traditional amortizing of small business loans that yields less interest payment if you do early repayment of the loan borrowed, this one doesn’t afford such benefits.


Conclusion

Merchant Financing is one of the best options if you need quick funding to cover your business expenses. Moreover, no collateral requirement and instant approval of your loan application are certain upsides that motivate borrowers to go for Merchant Financing.

Though it has some downsides, yet depending on the immediacy of fulfilling your business needs, you can go for it. Just ensure not to take it lightly as this is a financial obligation requiring adherence to scheduled repayment.