Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
The Role of the Merchant Capital Loans in the Development of Trading Enterprises
Guest Post | Jan 6, 2023
Every enterprise starts with a bold and bright idea, however, its development is nothing but a matter of funding. Getting a bank loan to start a business is difficult, as you need to go through a long application process, then the approval period and finally, the decision, which is not always positive. Such a time inefficiency makes the enterprise owners look for other ways of financial support — quicker and with less bureaucracy. One such type of funding is a merchant cash advance (or merchant capital loan). We are going to look into the procedure, its requirements, and its conditions so that you can decide whether it’s a suitable deal for your business.
First things first — merchant cash advance is not a bank loan and doesn’t work the same way; however, the level of safety is equal.
A merchant cash advance provides you with the money you need for your business development, however, the repayment comes from a percentage of an expected future profit, not in standard and fixed monthly installments. It is a good solution for those who need short-term funding.
What’s the procedure?
- A client applies for a loan.
- The lender analyzes and predetermines your future credit and debit card revenue.
- A client is sent the offer with all the terms and conditions mentioned — the provider’s fee and the percentage from your credit and debit sales, time frames (90 days to 18 months), cash flow, and expected monthly sales volume.
- The agreement is signed.
Some may claim that the fee and percentage from sales put businesses into an unfavorable financial position, yet that’s quite a misconception. Borrowing money for business development will always cost you additional money; you just need to understand the positive sides you will be paying back for.
1. Time efficiency
Business values time, however, it doesn’t resonate with bank loan processing. Merchant capital loans are a lifesaver in these terms. The longest time spent for the approval is 48 hours, compared to endless and tiresome bank procedures. Merchant cash is given to thousands of clients every day, which helps to maintain non-stop trading.
2. Flexibility
This is the most convincing option in favor of merchant capital loans. The conventional type of loan has quite strict regulations regarding time frames, with fixed periods of interest payments. Such an approach can be acceptable if the business activity is steadily high over the year. However, there are typically ups and downs in sales, and it may be a real struggle to pay off the interest rates during the slack or low seasons.
Alternatively, merchant cash advance repayments are based on the level of your sales: the more profit you generate, the more you can pay off; during the low season the level of payment processing decreases, and the interest rate as well.
Besides the payment periods can be discussed — daily, weekly or monthly payments, depending on what fits your business more.
3. Feasible requirements
The requirements for a traditional loan — a good credit score, payment history, sufficient collateral, income, low debt-to-income ratio, and potential origination fee. It looks like a bottomless pit.
The requirements for MCA — a bank account, a steady source of recurring revenue, and an individual taxpayer identification number.
The difference is obvious, with the merchant cash advances you will not be rejected due to the lack of collateral or long trading history.
4. Low minimum payments
The minimum payment for MCA is 1% to 3% of the balance or a fixed amount. The option is also discussed before signing the agreement.
5. An emergency help
Merchant cash advances come in handy when there is an unforeseen situation, or the need to upgrade the equipment and limited time for getting money. Considering how quickly the system works, it will help you get out of trouble and then repay the debt following a similar procedure.
6. High level of approvals
Typically, if the business owner isn’t granted a loan due to insufficient credit history, a merchant cash advance may be the best option, as their primary focus is on the transaction activity and history rather than the credit score. Therefore, small businesses with a short period of functioning, or anyone who doesn’t qualify for the loans, can take advantage of merchant cash advances.
A possible downside of merchant cash loans can be their high rates of interest (however, the money-landing is never easy on the wallet) and short-term functioning, typically for current needs. The relatively high interest rates vary depending on the provider, so it’s better to scan the market and choose the most affordable money-borrower.
See: Ep20-Jan 11: Bitcoin Backed Loans and 2x Credit – Putting Your Crypto to Work
Merchant loans are an affordable source of funding, especially in terms of small enterprises. The lenders offer a short-term financial solution in return for fees and interest rates of future revenue. Considering the flexible approach in defining the repayments and quick approvals, it can be the best solution for the current financial needs of the business as it helps to maintain the uninterrupted functioning of the enterprise.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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