A Better Option for Small Businesses: Merchant Cash Advance

Small business owners are discovering a new way to get operating capital. A merchant cash advance provides quick cash and an easy repayment method for businessmen with poor credit. Although the interest rates are higher than loans from a traditional bank, the convenience and fast approval rate make a merchant cash advance handy and popular.

Merchant cash advances are very simple. After being approved for a cash advance, a merchant is given a certain amount of money by a cash advance company. The lump sum is repaid with a percentage of the merchant’s daily debit card and credit card payments. This is especially beneficial for a merchant who has slow periods or a seasonal type of business. The merchant is able to keep cash flowing while still honoring the commitment to repay the loan. When the merchant’s receipts are high, the finance company is repaid faster.

Depending on the length of the repayment schedule, the actual interest rate for one of these advances is anywhere from 10 to 200 percent. Technically, a merchant cash advance is not a SBA loan. The cash advance company is buying a percentage of the merchant’s daily receipts. For that reason, merchant cash advance firms claim they are not governed by the usury laws that limit the interest rate on loans. For example, a merchant might sell $30,000 worth of future debit card sales for an immediate payment of $22,000. The cash advance company collects a small percentage of debit card sales every day until the full $30,000 is recouped.

Three types of repayment methods are used for merchant cash advances.

• Split withholding
This is the preferred method of collecting the premium. The merchant and the financing company agree to split the daily funds. Usually, the rate is between 10 and 22 percent.

• Lock Box Withholding
The merchant’s credit card sales are placed in a bank account that the finance company controls. The merchant then receives its portion via direct deposit, EFT or ACH. This method is not preferred by merchants because all payments are subject to a 24-hour delay.

• ACH Withholding
The finance company receives a report detailing the day’s receipts and deducts their share from the merchant’s checking account.

Merchant cash advances are popular because traditional lenders are not as abundant as they once were. Finance companies look for merchants with high daily receipts and poor credit. Qualifying is easy if the merchant has been in business for at least six months.

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