While merchant loans have been heavily criticized by traditional lenders, they offer a convenient way for small business to obtain the capital they need when banks are turning them down.
While traditional sources of capital are trying to demonize the advance lending industry, claiming that the fess they are charging amount to usury in most states, and may even eclipse the fees traditional mafia related loan sharks would charge. Obviously conventional sources of capital have a vital interest in scaring business owners away from alternative sources of capital
Proponents say that you can’t compare them with traditional loans. Merchant lenders rather advance cash in return for a share of future credit card charges. By only collecting a fixed portion of monthly credit card sales business owners don’t need to worry about having to pay back the loan when the business is slow. But when business is better than the loan is paid back faster.
Especially in this hard economic times it is almost impossible for a small business owner to find the capital to keep their business afloat from conventional sources. Let’s assume you own a small retail store and your vendors decided to tighten their credit terms. You find yourself in a sudden need of additional capital to keep your shelves stocked. Banks look at you and they see an increased risk because your financial situation is tighter and most likely they will decline your loan request.
As an owner of a retail store you don’t have many options. Your typical sources of working capital is the cash flow of your business and the credit lines you have with your vendors. If one of these sources shrinks, you are quickly running out of options.
The merchant lender however looks at your monthly credit card sales. If your sales are sufficient they will advance you for example $10,000 for a fee of maybe %25. In total you will pay $12,500 to the lender over time as a portion of your future sales.
Now the advance provider wants to make sure that the portion of future credit card sales he is taking of the top is not hurting your business and allows for enough cash flow for you to continue to run your business. Typically he would try to limit his take out to no more than 10% of your monthly sales. In our example that means that you would need to have average monthly sales of $20,000 to cover for the advance.
Of course they will also benefit if your business is doing much better thanks to the additional cash you have available. If you double your monthly sales you will pay them back in half the time. Your fees and costs stay the same. Quick turnaround is in the best interest of the lender and you as well.
On the flip side however, if your business takes a downturn you still continue to pay the same fixed portion of your monthly sales to pay back the advance. Instead of being burdened with a fixed monthly payment your payment is always related to your actual monthly sales.
In summary you can say that merchant loans are a valuable addition in the toolbox of small business owners to gain easy and convenient access to capital when needed.
A merchant loan is a great way to inject working capital into your business, when you need it most. Unlike traditional finance, Merchant loans are very flexible and can be used for any business purpose.
