By Rosemary Peavler | About..com
Here’s the way the merchant cash advance works. When a company gets a merchant cash advance, the deal is the purchase and sale of future credit card income. No regular fixed payments are required by the company. The lender collects a set percentage of the company’s daily credit card sales. The collection continues until the lender recovers what they advanced to the company along with their premium. Usually, the lender tries to collect the advance within one year.
One thing that is attractive to companies about the merchant cash advance is that, when they have a slow sales month, their payment to the advancing company is lower since they collect a set percentage of credit card sales. Another attractive feature is that there is no actual due date for the advance to be paid off. It is paid off when enough credit card sales are made for the advancing company to recover the advance and their premium. In addition, no collateral is required to secure the advance.
As a result of tight bank credit, small business owners have had to turn to other sources of credit for their financing needs. Merchant cash advances have been one of these sources. A merchant cash advance is not a loan. It is a lump sum advance of money to the company against future credit card sales.
The Premium Collected by the Advancing Company
There is no interest rate attached to a merchant cash advance because it is not a loan. Instead, the company making the advance collects what they call a premium or a percent of the credit sales of the company receiving the cash advance. For example, the advancing company may collect 30 cents for every dollar of credit sales the company makes until the advance is paid off. If you convert that into an interest rate, you can see that merchant cash advances can be very expensive.
One difference between credit card financing and merchant cash advances is that merchant cash advances don’t raise or lower interest rates (premiums) or credit limits. Regular fixed payments are not required with merchant cash advances as they are with credit cards. The only comparison is with regard to the payments you must make for the use of the money – the interest rate with regard to credit cards and the premium with regard to merchant cash advances.
Is the Merchant Cash Advance a Good Idea for Small Business?
Merchant cash advances are only one of several alternative financing options for small businesses. Just like with any financing option, there are positive and negatives. In a tight credit market, small businesses often have to take funding where they can find it. A merchant cash advance is a type of receivables financing. It is targeted receivables financing with the only receivables used being credit card transactions.
A merchant cash advance is not a loan for several reasons already mentioned. Another reason is that if the company goes out of business, the advancing company takes the loss. However, critics accuse the merchant cash advance industry of skirting usury laws. Usury laws protect consumers from lenders charging unreasonably high rates of interest or, in the case of merchant cash advances, high premiums for the use of advances.
On the other hand, merchant cash advances have helped a lot of small businesses survive, particularly during the recession. If a business has a short-term cash flow problem or needs immediate access to funds, then a merchant cash advance can definitely help. Using it for long-term financing may not be a good idea if the premium for the financing is high. However, if the premium is similar to rates you might get on a bank loan, then you might use merchant cash advances for longer term financial needs, such as buying equipment or investing in product development.
One excellent source you might check out for a merchant cash advance is Nectar Cash-Flow Advances, a reputable source of Merchant Cash Advances.
Small business survival is necessary to the recovery of the U.S. economy. Since the business credit crisis began, we have seen that if small businesses rely only on commercial banks to fund their business loans, they aren’t going to be able to hire workers, buy inventory, or meet any of their other obligations for survival. They certainly aren’t going to be able to thrive. Small businesses are scrambling to replace bank financing with other types of acceptable financing.
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