Small business owners who have typically relied upon bank loans for funding are more frequently turning to merchant cash advances as an alternative. The change is more pronounced now as more banks turn down applications for business loans, which can take several months to process in some cases, and rely upon the applicant having good credit.
As an alternative to traditional bank loans small business owners can be quickly approved for merchant cash advances which are not reliant upon credit scoring. As long as the business has been established between six months to one year, dependant on the providers terms, and has a proven record of monthly credit card transactions of anywhere between $1500 and $5000, the business will be approved for an almost immediate cash advance.
Cash advances vary in amounts but are in general around the $25,000 level. The business repays the cash advance provider, typically with 10% of their daily credit card sales, which are distributed by the merchant credit card processor. It is generally Visa and MasterCard who participate but some lenders now accept Discover and American Express too. Levels of interest vary between 7% and 80%, with the average interest rate being 25%.
Merchant advances have many advantages over traditional loans, as repayment terms can be variable. As the business repays from daily credit card receipts there is no obligation to repay the advance by a set date in the month. Instead if the business has a quiet period they need not worry about meeting a loan repayment. This is ideal for any business which has seasonal trends, as when they take more money they simply repay more, and when times are quiet they are relieved of the stress of trying to make the repayment.
The merchant advances carry no fees. There are no application fees, processing fees, or late payment fees. Also the repayments are not recorded with the credit bureaus. As they work by repaying from future receivables they are available to those with poor credit, often a problem for businesses which rely on cash flow.
Naturally the merchant advances have been criticised by some due to their high interest rates, and it is difficult to find lenders willing to publish their interest rates until the application is made. However the business can research first to know what the interest rate will be, and as the advances are typically for one year they can work out an excellent deal, particularly for those businesses which require an immediate input of cash which a bank may be slow to provide, or decline.
Although merchant advances are not subject to the same regulations as loans, they carry respectability with them due to the partnership with reputable merchant credit card providers. They are a good choice as long as a lender is chosen who does not levy an excessively high interest rate.