Pros and Cons of Merchant Cash Advances

For small and online business owners in need of fast access to capital to grow their business, business cash advance – also known as “merchant cash advance” – is a solid option. A merchant gives businesses upfront cash or capital in exchange for a percentage or a portion of future credit card sales.

Many small or online businesses are in need of cash advances for things such as making payroll, growing inventory, purchasing new equipment/packaging/supplies, marketing or advertising dollars, and expansion/renovation of business, rent payments, and more.

If you have had strong sales, but struggle with little or bad credit, a merchant cash advance may be a particularly good option for your small or online business. Getting the capital you need when you need it can mean the difference between the success and failure of your business.

Note: You typically will not qualify for a merchant service cash advance if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not already have the ability to process credit card payments for your customers.

Traditional lenders, such as banks, are often reluctant to extend traditional loans to businesses with poor or bad credit. Such businesses will be deemed “too risky” and will have great difficulty in securing a traditional bank loan for their business needs. This can be a problem for many small or online business owners who need the capital to purchase additional inventory, produce goods, or operate their business. This is where a merchant service cash advance can come in handy. A merchant cash advance gets you the money you need at a fast turnaround time so you can continue to run the day to day operations of your business.

How Are These Advances Different From a Traditional Loan?

Merchant Cash Advances are different from traditional loans because rather than having a fixed repayment plan with a set interest rate (similar to how you would pay your car payment each month), merchant cash firms and alternative business loan lenders such as Kabbage recoup their funds by collecting a percentage of the business’ total credit card sales each month. In addition, the business would pay any fees associated with the business loan.

Benefit – Get Cash Fast:- One of the biggest positive factors for small or online businesses when considering these kinds of business advances is getting the cash quickly. Business cash advances do not take as long to process as traditional bank loans. In fact, some cash or capital can be delivered to the business within hours of submitting an online application. This is good news for business owners who simply don’t have the time to wait for long processing that is typical of many banks and larger lenders.

Benefit – Little to No Paperwork:- Everything is done online. So there’s no lengthy paperwork to fill out, fax, scan or mail. This decreases your wait time and increases your turnaround time.

Benefit – Repayment is Not a Fixed Monthly Amount:- Another benefit when considering these types of advances is that repayment may be easier over time. This may work in the business’ favor, particularly if sales are slow at first, because payments are based on a percentage of sales, rather than a fixed monthly amount. So for example, let’s say a merchant cash advance company offers XYZ Business a merchant service cash advance in the amount of $10,000, with repayment terms of 10% of monthly credit card sales. The first month’s repayment amount is automatically sent back to the company and is a percentage of XYZ’s monthly sales. If the first month’s sales following the advance were $1,500, then XYZ Business would have $150 deducted automatically (via PayPal or other transaction service) to be paid to the company that issued the merchant cash advance. If the second month’s sales were only $900, then XYZ Business would have $90 deducted.

Note: the amount of your loan, or advance, will be based in large part on prior credit card sales. Do your homework and come to the table prepared to show current and prior sales so you can know the terms of your loan completely.

Benefit – High Approval Rates:- This is good news for struggling small business owners who may have been turned down for traditional loans by banks and other lenders. High approval rates from companies offering merchant cash advances means higher chances of securing the capital you need.

Benefit – Perfect Credit Not Required:- This is a big factor for many struggling small or online businesses. As the economy takes dips and swings from high to low, the effects are felt largely by the small business owners. These effects can include dwindling markets, low sales and worst of all: bad credit. And unlike larger corporations with millions of dollars at their disposal, small businesses are often unable to get the capital they need to sustain their business because of their bad credit rating. Companies that offer merchant service cash advances offer a lump sum of money in exchange for future sales, so they can approve these advances with little basis or consideration of poor or bad credit scores. Definitely a plus for business owners.

Benefit – No Collateral Required:- Again, because these cash advances are not like traditional bank loans, there is no collateral for a business to put upfront. Rather, the approval of the transaction is based on the businesses past credit card sales. So, if your sales are strong, you stand a good chance of being approved for a cash advance.

Caveats for Merchant Cash Advances:- While there are many benefits to consider about pursuing a cash advance, there are some things to be aware of as well. As a business owner, the decision is always up to you. Only you know what makes sense for your business and what will propel your business forward. With that in mind, here are a few things to consider regarding a cash advance.

Higher Interest Rates In Some Cases:- Be sure to thoroughly review the terms of repayment so you know exactly how much you’ll be responsible for repaying.

Unregulated Industry:-This segment of the lending industry is not regulated – again, because their repayment terms are tied to future credit card sales. This is why it is critical to do your homework. Reputable companies, such as Kabbage, have a leadership team with years of experience in the industry. This is important when you’re considering additional funding for your business.

Fees:- Companies that offer merchant service cash advances can charge a variety of different fees. Ask your provider upfront so you can make the best decision for your business.

The Bottom Line:- As you do your homework and research these companies online, you’ll want to consider things such as reputation. Check the Better Business Bureau for ratings and client feedback. Examine their website thoroughly. Look at their leadership team and the experience they bring to the table. Look at their press room or media room to see how they’ve been portrayed in the media. And check them out on social media, too. 

Source:- https://www.kabbage.com/blog/merchant-cash-advance-the-pros-and-cons/

Why do banks reject small business loan applications?

Well, whether you a start-up, store owner, entrepreneur or planning to be one; let me warn you, the life ahead is no longer that rosy it seems from outside. No one ever tells you the truth about the future, one has to go out explore for himself. Small business owners are regularly confronted with various threats to the very purpose of their existence and moreover difficulties faced in securing finance.

Getting finance is a cumbersome task for majority of small businesses despite the government and industry backing. Though the options are available for them but still businesses are rejected for small business loans. There is a constant struggle between banks & small businesses.

The various researches point out that despite the positive economic landscape, still small businesses find it tough to reduce their operating costs and foresee exigencies. All this leads to lack of growth and cash flow crunch for the businesses. But when they apply for small business loan; they are denied. This creates a vicious cycle of slowdown; they start downsizing both manpower and operations, pool in individual funds and increase the risks associated.

But the basic question is, why they are rejected? A bank provides loan based on the business’s credit score and majority of small business owners are unaware of their ratings, leave alone interpretation of the credit score. Their indifference to creditworthiness leads to long term damage to their business, when they pool in individual funds to manage the short term credit crunches. The industry associations have developed systematic mechanisms to generate business credit scores for the small businesses; banks use it to evaluate your loan applications.

The score includes the historical payment cycle of the small business loans availed and the personal capacity of the owners while determining the current scores. It is an ongoing process to build your credit score and timely payments to suppliers help build your score strong. 
Once the small business owner is able to anticipate his credit worthiness, he is better positioned to succeed. If you know your scores well, you can project your growth rate better and chances of being rejected get nullified. Moreover the small business loan application process becomes smooth and fast.

You need to take charge of the situation, understand the market mechanism, create synergy and easily get your small business loan approved. And with your small business loan, not only your business grows but the whole economy thrives.

Source:- http://www.lendclouds.com/blogs/why-do-banks-reject-small-business-loan-applications

Merchant Cash Advance: New Class of Finance

Wikipedia states that a merchant cash advance was originally structured, as a lump-sum payment to a business in exchange for an agreed-upon percentage of future card based sales. The cash advances are not exactly loans but a portion of future card sales, sold to third party beforehand. The companies working in this periphery are gazing the clients of the small business factoring companies. They operate in a fairly large unorganized market and their interest rates are quite high compared to others in the lending market.

These have a diversified distribution channel and this can be attributed to their growth. The small businesses on lookout for credit, find MCA a better option as it provides greater flexibility to them. The sales volume determines in the payments to MCA and offers elasticity in cash flow management in case of seasonal businesses. The credit process is faster and serves borrowers by giving faster access to business capital.

Merchant cash advancers initially started with the factoring the credit card sales. The size of sales of small operators is small and so is the loan amount. This way the risk associated with the invested was manageable for most MCAs. The insurgence of technology in banking and finance led to changes in payments also. Apart from credit card sales, merchants have cash and debit card sales too. And this led to a crowded market for any substantial growth. The new domain to explore is the B2B and B2G transactions.

The documentation process with MCAs is simpler which makes on boarding easy for merchants. Apart from regular card payments the merchants have moved to refinancing of the larger factoring clients. Their business mechanism helps generate regular flow of funds, even when you are trapped in debt. They do not care about the other lien holders and related issues, just need the comfortable daily account balance to finance your business. They help businesses generate funds external to their credit worthiness.

The major concern for any merchant going in for MCAs is that they don’t abide by the laws and regulations. The MCAs are backed by the large private equity funds and have a bigger risk appetite.

Source:- http://www.lendclouds.com/blogs/merchant-cash-advance-new-class-of-finance

Why you need a Business Loan?

While conversing with your friends, business partners and lenders, you unknowingly touch on this topic; I need a loan, more specifically a small business loan. People respond in different ways, as to what might happen with loan, why you need it etc. You face it every time, if you run a small business.

Depending on your current business circumstances, there could be various reasons as to why you need a loan. Your small business requires a rise, or you need working capital; the list of purposes is endless. Getting a small business loan is not that relaxing but more important is actual reason of asking for a small business loan.  

Here we jot down major points which require you to indulge in probing for a small business loan.

·          
You wish to expand the office space: The cubicles are all filled, new people are looking for place to sit & work; in a retail store you may need place to fit in more goods for display. All this points out that business is expanding; revenues will increase. But you may not have funds to grab this opportunity, as costs involved are significant. Before pampering your business with a loan, just measure whether the profits from proposed expansion, will cover the loan costs and maintain profit margin? You may use revenue forecast methods or other available research techniques to know the impact on business.

·         Want equipment for business: You need certain machinery for manufacturing or improving service quality of your goods and services; and you need funds to buy that. What is the actual requirement of the equipment, its future value and utility, all needs to be considered. The pricey machinery could also act as collateral in future for business loan. But make a balance between the actual need of equipment and good to have it situation.

·         Require product inventory: Inventory is an expense if the churn out ratio is low. In case of dynamic tech industry, the products may soon become obsolete with no buyers for it. Same is the case with season based business, you need to purchase enormous inventory and stay with it during off seasons. All this again needs funds, so always calculate the debt cost with the projected sales margin and then jump in for a loan. 

·    A business opportunity knocks your door: Your business got a new client or a big order, but you lack resources to complete it. Determine the real return on investment, the pros and cons of loan and then take a decision based on numbers, not on your feel good factor.

·         Thinking of future: You will expand the business in few years down the line & would require large scale finance for it.  So why not start building your credit worthiness from now. A strong credit history with on time repayment will build the credibility of your business. Here again do consider that whether the amount of debt can be paid back on time, otherwise you may tarnish the market reliability of your business.

Regardless of your reasons to go for small business loan, if the loan is able to improve the business in both long & short run; just go for it! Be confident in your abilities and succeed in business. 

Resource:- http://www.lendclouds.com/blog/why-you-need-a-business-loan

Three Tips for Getting a Business Loan: What You Need to Know

Applying for a business loan can be intimidating and stressful, and it can be confusing to have an application rejected with little explanation. There are steps company executives can take to avoid some of the possible confusion and to develop a more positive experience while applying for a business loan. Two of these steps are described below, and should be completed prior to approaching a financial institution about a loan.

 

1) Research Lender Options

Like any business operator, financial institutions want to make money in their business. While they want to lend money, they don’t want to approve credit that will ultimately result in loss. Further, regulatory requirements often influence the types of loans that can be approved. As a result, a major concern of any institution considering approving a business loan is whether the owner and the business are good risks.

“Good risks,” however, can mean different things to different lenders, which is why it is a good idea to do some basic research on the financial institution you’re considering before walking in and trying to apply for a loan.

2) Articulate Needs and Repayment Plans

According to a recent Pepperdine study, banks and asset-based lenders only rarely cited a company’s size or economic concerns as the reasons for declined loans. Instead, the top reasons were tied to the quality of the business’s earnings or cash flow, or to the fact that the company had insufficient collateral.

More simply, the borrower didn’t meet the lender’s requirements.

Business owners and lenders often have mismatched expectations from the start, so it is good to ask a lot of questions to avoid confusion and additional problems. More importantly, lenders desire potential borrowers who approach the bank with a detailed plan for using the money and for repaying it.

Is the money for growth to buy a certain piece of equipment or to open a new facility in a neighboring town?  Is it for working capital because you’re behind on payments to vendors and you’re about to get cut off, or is it because your sales have outpaced your ability to finance raw materials?

“We’re not afraid to loan to businesses that can clearly demonstrate and articulate the plan – the plan for repaying the loan, for improving cash flow or whatever,” says Mark Swanson, acting president and CEO of Northside Bank. “I’m not talking about a 20-page binder. It can be a handwritten single page that says, ‘Here’s my problem, here’s how you can help, and here’s how I intend to repay it.’ What I want to see as a banker is that you as a business owner understand your business, understand what has caused the problem to begin with, understand how you’re going to fix that, understand how the bank can help and how you intend to repay the loan.”

3) Respond to Roadblocks (Potential and Real)

Knowing how a business stands on key financial metrics that predict default is important when a company is considering seeking a bank loan. Sometimes the evaluation process itself will allow a company to address potential roadblocks to a business loan.

For example, a company owner might recognize the need to identify additional collateral for a loan – stocks, bonds or the owner’s house. Or a business owner may decide that the timing probably isn’t ideal to seek a business loan, Booth says. “If the person can kind of do their own homework, they may ask, ‘Does it make sense to ask for this?’"

The owner may decide to work on extending payables, or to offer a discount for faster payment on receivables in order to generate some additional cash flow that can make a credit request more attractive in a few months.

Source:- aabacoSmallBusiness