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What’s a Merchant Cash Advance

by admin   Oct 09, 2018   Filed Under: Uncategorized

According to an article that was published on the Forbes Magazine back in May 2018, the local entrepreneurial spirit is on a steady rise. In just one year, the demand for small business loans among small businesses rose from the 29 percent of 2017 to the 50 percent of 2018. Since small business account for up to 99 percent of the nation’s total business, it is only rational to conclude that a majority of them can’t gain access to the lump sum amounts of capital that they need in form of loans. However, merchants can definitely ride on the robust wave of American economic revival if they will be smart enough to seek out merchant cash advances.

A merchant cash advance is a short-term business financing option that buys some equity of a merchant’s debit and credit card sales for as long as the agreed-upon repayment sum remains unsettled. It does not qualify as a loan by legal definition, but it can do much more for a business than any typical loan. When you take a merchant cash advance, you typically sell part of your future sales proceeds to your provider up to the limit of a certain repayment sum. Sometimes, these advances can be too expensive to help your business. However, if one makes financial sense, it can leave your business bigger and more stable than it was previously.

How It Works

Financial analysts explain that merchant cash advance providers are typical loan sharks. They have the capital to do business, but they often lack the resource of time. To grow their financial worth, they invest in the inventories of well-run businesses. Their business sense is always impeccable, and they seldom provide lump some cash advances to businesses that lack great sales portfolios. They do not need to assess merchants’ credit scores to qualify them for the advances. Instead, they only assess their business accounts to determine just how possible it would be to recover the repayment sum through sales. That is what loan sharks do, and they are not regulated by usury laws even though they reap heavily from usury prospects.

Let’s examine the example of a promising online design shop that sells designer bags. The merchant sells about 70 bags weekly and could sell more if production factors were expanded. The merchant calculates that if the business could access a lump sum loan of 20,000 dollars, it could sell about 1,000 bags at an oncoming week-long festival. Traditional banks would require hard securities to issue out the loan. Also, they would probably drag the loan application process for so long that it would be impossible to leverage the incoming opportunity. Banks are rarely moved by such opportunities. They are always moved by guaranteed security assets. However, loan sharks are always eagerly waiting for entrepreneurs with such lucrative opportunities to come through their doors. Therefore, the merchant approached one loan shark for a merchant cash advance of 20,000 and got approved. They agreed on a repayment sum of 24,500 dollars. Immediately after a negotiated grace period of a week for production expansion, the loan shark started receiving 15 percent of the merchant’s debit and credit card sales directly. Fortunately, the merchant managed to produce and sell 1,300 bags at the festival. Despite outperforming its targets, the loan shark ceased obtaining part of the merchant’s sales immediately after it received up to 25,000 dollars from the merchant’s sales.

While most loan sharks are always just interested in your sales, some try their best to improve the general state of their clients’ portfolios. They report their good business to loan databases to improve their clients’ credit scores. However, some do not make such efforts.