Merchant cash advances are basically a program developed for businesses who do not qualify for a loan from a bank, yet still need a way of getting funding. A lump sum payment is forwarded to the business in exchange for an agreed percentage of future credit or debit card sales. If you use a bank card to pay for purchases at a shop, they are required to inform you of an extra charge that will be put on top of your purchase (such as 2% or 25 cents), which will be used to pay for the cash advance. The advance is continually paid back until the balance is met. Many businesses keep track of their payments through a completely automated system that works through phone lines at the checkout point.
Advantages and disadvantages of merchant cash advances
Clearly the biggest advantage is that a store can get a sizable amount of money that they can use to invest in the business. Sometimes it is not possible to secure a bank loan to start a business up and owners will make a deal with a merchant cash advances seller to help them start their business up.
Another big advantage of this service is that unlike a loan, the payments are not time based. They are simply deducted as a percentage of sales until the advance is completely paid off. This is sometimes the best deal for businesses that depend on seasonal sales — for instance a ski lodge or a holiday resort. Normally, these operations do not make enough money during some seasons of the year to be able to constantly finance a bank loan, so the merchant cash advance system works out very well for them.
Sometimes merchant cash advances can have a higher percentage interest rate than a bank loan, generally between 5-10% until the debt is paid off. But because of the simplicity and speed with which the system works and also because many businesses are able to get these advances very quickly, it is a less secure way to get money when you need it.
Different types of payment systems
The most common way in which merchant cash advances providers collect their loans are through what is known as a split withholding loan. Basically, when the credit card processing company charges a customer for a service, it automatically splits the credit card sales between the business and the finance company as per the portion agreed beforehand (often between 10-25%). The reason why this is the most common is because it is transparent for the customer and fully automated. This method is the fairest for both parties involved in the deal.
Other methods incorporate systems whereby the earnings from the company are forwarded to a bank account controlled by the loan provider and then redistributed according to a pre agreed rate back to the business. This is not instantaneous though and can be delayed by bank processing times. Additionally, many businesses do not prefer this method as they feel they have no control over their finances.
The last common method is that a direct debit payment is set up in the borrower’s bank account that the lender of the money can use to process payments automatically when they receive information from the credit card company after a sale. This is the method that lenders prefer the least, because they might not be able to collect what is owed to them if the business is doing badly.
Merchant cash advances are very common and because of this system it is relatively easy to set up a business (such as a corner store) that requires a high investment from the beginning.
Description: Merchant cash advance is a system that allows business owners to take out a loan if they are unable to use their bank for some reason from a provider who then charges them interest on credit and debit card sales until the loan is paid off. Read on to find out more about how this works.
