(Ping! Zine Issue 25) – If you are like most business owners you are probably always looking for financing sources to grow your business. Perhaps there is a new marketing campaign you want to launch or a new piece of equipment that would help you expand. Or maybe you need to stock up on additional inventories in anticipation of the holiday shopping season. Traditional sources of financing are becoming increasingly difficult to qualify for. But a relatively new industry has sprung up in the past few years that offer cash advances based on anticipated credit card sales. Under a typical program merchants can be approved for $3,000 to as much as $300,000 based on a review of their credit card processing volume and typical daily receipts.
What is a Merchant Cash Advance?
A Merchant Cash Advance (MCA) involves the purchase of a portion of a business’ future credit card sales at a discount. Merchants receive a lump sum of cash from the MCA provider for use as working capital. Some of the more common uses are:
• Working Capital
A Merchant Cash Advance is not a loan – it is the purchase of specified amount of future card sales. Because it is not a loan it has no fixed term. Instead, the MCA provider collects a fixed percentage of the merchant’s daily net settlement batch through a process known as “batch-splitting” or a closely related variation through the Automated Clearing House (ACH). As a result, the repayment of the advance correlates with the merchant’s cash flow and is better aligned to the short term fluctuations of their business than traditional financing arrangements which require the payment of a fixed dollar amount regardless of sales volume.
MCA providers usually require less paperwork than traditional lenders and can often fund the advance in a week or less. To qualify for and advance, most MCA providers require merchants to have been in business for nine months and maintained a minimum of $1,500 to $4,000 per month in credit card sales for three consecutive months. On average, MCA providers advance about one-and-a-half times the merchant’s monthly credit card sales volume.
Pros and Cons
One of the biggest advantages of an MCA is that it is unsecured, uncollateralized and does not require a personal guarantee. Another big plus is that there are no set payments. So, during slow months merchants pay back less money. In addition, there are no penalties if merchants decide to pay their advances off early.
A Merchant Cash Advance is more costly than traditional sources of capital due to the fact that there is more risk to the MCA provider than to a traditional lender who typically will have recourse against the assets of the business or the owner. The MCA provider will calculate a retrieval percentage based on your type of business and an analysis of your processing history. This percentage can range from 2% to 9%. It is important that you determine whether or not your margins are high enough to absorb this additional cost so you do not run the risk of going out of business.
Another drawback is that most MCA Providers will require the merchant to agree not to switch their credit card processing account.
Finding a Reputable MCA Provider
Most payment processors have a relationship with a Merchant Cash Advance Provider. Chances are that they have done some due diligence to make sure the company is reputable. This industry is still growing and is self-regulated. Some disreputable MCA Providers might increase the retrieval percentage without the merchant’s consent if the merchant’s sales slow down and the MCA Provider is not getting their money back in a timely manner. Make sure all fees are clearly disclosed in the contract. Choose a provider that has the infrastructure in place to support their client base enabling you to receive answers to questions and get problems resolved within reasonable times.
A Merchant Cash Advance can be an excellent non-traditional source of working capital for many small business owners who don’t qualify for traditional types of financing.
About the Authors:
Russ Gottlich, CPA is CEO of FDIS Loud (www.fdisloud.com), an independent agent of First Data Independent Sales (FDIS), a leading provider of payment processing services and tools for Internet and retail merchants worldwide. Corey Bryant has been with FDIS Loud since 2002 and is an expert in the field of e-commerce. He currently writes a blog at www.mymerchantaccountblog.com.