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Does your small business need funding to grow? If you don’t have cash in your hands, there are many types of financing to consider. Out of your options, many business owners often go with merchant financing. So what is merchant financing? And can it really benefit your business? Read on to decide whether or not this type of cash advance is a suitable option for you.
What Is Merchant Financing or Merchant Cash Advances (MCA)?
As the name suggests, in exchange for future credit card sales, a merchant receives funding. Many people often think that MCAs are loans, but they are not. This kind of financing doesn’t have technical details found in loans like collateral or fixed terms of repayment. Instead, lenders give a lump sum of money to the business and receive principal repayment in the form of credit or debit card sales.
Interest rates can be slightly higher than a typical bank business loan with this financing option. Despite this, there are still some significant reasons why businesses should consider this financing option.
How Does Merchant Financing Work?
Just like when taking a bank loan, a business owner needs to apply for merchant financing from companies providing the service. In most cases, applications are available online. Upon lender submission, your business will undergo a risk assessment to determine if your business is a good fit for the funding model.
An essential piece of information looked at is how much your business gets in the form of electronic payment sales. Be prepared to provide bank statements, credit card processing statements, and as well as complete a business profile. If you’re eligible and accept the lender terms, a system is set up to automatically take a portion of credit card sales for repayment of the funding. This process continues until your business has repaid the terms in full.
With this funding strategy, when your business is doing well in terms of electronic payments in the door, you’ll start paying more towards your financing. But when it’s slow, you’ll also pay less. This is a crucial benefit to MCA financing.
What Are the Typical Terms for Merchant Financing?
Like a loan, there are terms to review in detail and understand before signing on the dotted line. Be sure to consider:
- The amount your business is set to receive and the repayment timeframe to pay back the advance. Merchant financing can range between $250 to $250,000, and the typical repayment term is between 3 to 18 months.
- Factor Fee. This is similar to an interest rate, and the average usually is between 1.14 and 1.18.
Why Is Merchant Financing Beneficial to a Small Business?
Every business will, at some point, require funding. Merchant financing is a suitable option because it is easy to qualify for. MCAs are flexible since terms are typically negotiable, and small businesses easily meet requirements. Also, unlike bank loans, MCAs don’t require hard asset collateral in exchange for the funds. Therefore, your business receives a financial benefit without risking essential assets.
Additionally, the application process is typically fast. Many MCAs take only 24 hours to be processed and disbursed. So, if you’re in a business financial emergency, merchant financing may be worth looking into. Another key factor to be aware of is your business credit score – learn more here.
Many reputable companies are offering the platform, choose the right partner for your business, and make it easier to get through your business’ growing pains. If looking for options to automate and innovate your electronic payment process, be sure to reach out to Payment Savvy to learn what your options are. For over a decade, our custom payment solutions help boost small businesses just like yours.