What is a merchant cash advance?
A merchant cash advance is an alternative financing source that merchants can take advantage of when business loans are difficult to obtain or do not fit the needs of the business. Unlike traditional loans, which may require extensive paperwork and funding restrictions, a merchant cash advance offers flexible financing with less paperwork and quicker funding turnaround. Read on to learn more about the benefits of merchant cash advances.
By definition, a merchant cash advance is the purchase of merchant processing receivables. Simply stated, merchants receive funding now based on credit card sales in the future. This is often an attractive alternative for business owners because the process typically takes less time with less paperwork compared to a traditional bank loan.
Problems with traditional funding:
- Traditional loans can be difficult to qualify for.
- Traditional loans often require a personal guarantee.
- Traditional loans may be secured by business or personal assets.
- A traditional loan payment is not flexible.
- Many traditional loans do not offer flexibility when it comes to how the funding can or will be used.
How does a merchant cash advance help solve these problems?
Usually merchant services ageements don't require business to sign a personal guarantee, and the approval process is based on the business, not on personal credit. Merchants are approved based on historical credit card processing volume and then advanced an amount to paid back within about 12 months. Approval processes are usually quick, with minimal paperwork, and some companies can get merchants the money they need in five days.
Another great advantage of merchant cash advances is the payback method. Payments are made to the cash advance company out of daily credit card processing batches. The payment therefore budgets itself and merchants do have to worry about writing yet another check. The payment is a fixed percentage, which means that the payment amount flexes with the merchant’s business. Unlike a set fixed payment, if the merchant has a day with lower sales, the payment is lower. When merchants have a day with higher sales, they make a higher payment toward their balance.
Let’s look at a specific example. If a merchant must pay a $1,000 monthly payment for a bank loan, it will have to pay that $1,000 whether it has a good or bad month. If a merchant pays a back a cash advance and usually contributes around $1,000 but has a bad month, it may only pay $900 that month. The merchant is not penalized for the lower payment. As you can see, merchant cash advance is funding that works with merchant’s cash flow.
Merchant cash advances also offer very flexible uses. The money really becomes the merchant’s money to do with what they’d like. Because the funding is secured through the future credit card revenues, it is not required to be used for any one thing that can later be used as collateral. Therefore, merchants can use some of their advance for cash flow management to upgrade a POS system and to upgrade a patio or other outdoor space.
How is a merchant cash advance payment determined?
There are two payback rates for merchants to know when receiving financing through a merchant cash advance.
One, merchants pay a factor of their financed amount. The factor rate can range from 1.15 to 1.4.* As an example, if a merchant borrows $10,000, the merchant would pay back 1.15 multiplied by 10,000 for a total payback amount of $11,150. This money is paid back by credit card batches in the future. Because there is no timeframe associated with merchant cash advances, there is no interest rate.
The second rate to be aware of is the percentage that will be taken from daily batches to pay back the financed amount. For example, if a merchant agrees to a 12 percent daily payment, and the merchant has a $1,000 batch on day one, the merchant would pay back $120 of the above $11,150. If the batch was $2,000 the next day, the merchant would pay back $240.
Vantiv provides merchant financing with several types available to help you. Vantiv also provides proprietary POS financing to merchants who start a new merchant account with Vantiv while in the process of buying a new POS. For merchants who are not purchasing a new POS or already process credit cards with Vantiv, Vantiv provides financing via merchant cash advance.