The Merchant Cash Advance and Why is it Beneficial?

Jul 23, 2011
Colleen Kelley

Cash - imelenchan

A merchant cash advance is an alternative source of finance for a business. Find out what they are, how much you can borrow and who can qualify.

A merchant cash advance is designed for existing businesses that need quick cash but may not qualify for a bank loan. The lenders offer businesses a lump sum cash payment in exchange for a share of future credit card sales. Such advances, being fairly new, are not regulated at the federal or state level, and lenders are trying to establish their own regulations to avoid scrutiny from lending officials.

Who Benefits from A Merchant Cash Advance?

Businesses that find these advances useful are clothing stores, grocery stores, restaurants, auto repair shops, furniture stores and liquor stores to name but a few of the businesses that have been helped by such loans. The cash advance for merchants is sometimes the only option for businesses to get the necessary money to help them through a cash flow crisis or to enable the business to expand.

It's Not a Loan

Lenders who offer an advance to merchants point out that they are not loans but a purchase of future income. The lender collects a set percentage of daily credit card sales until the money is recovered. The advance comes with a premium that can be as high as 30%. It has no set payment requirements or repayment timeframe. Most businesses pay the advance back in about 12 months.

Who Can Qualify?

A merchant advance might be right for the small business that has credit issues or little or no collateral, but has strong credit card sales. The payments vary depending on sales, and a slow month will result in a smaller payment than a month that sees brisk credit card sales. A business that takes a standard, small business loan is bound by contract to pay a certain amount of money each month for a certain number of months regardless of how well or poorly sales are.

Qualifications

The applicant must own a business and process credit card payments. Most lender’s charge no application fee, so the funding is completely unsecured. This means that there is no collateral or guarantee necessary to obtain the loan, so approvals are made within 24 hours and the funds are usually available within 7 days. Most lenders offer cash up to $250,000 with automatic renewal for businesses that need additional funds. Merchant advance funds are not available for new businesses.

The Future

Being a relatively new lending venture, the cash advance for merchants has only tapped a small percentage of the businesses that would benefit from its program. As the lending practice grows, there are those that want to put regulations in place to cap the high finance rates. It would be in the best interest of all businesses if the lending practice was uniform in all states.