Have you started with your business? Are you looking for quick funding for a small business? The good news is that if you are hunting for business finance, then you should explore the concept of merchant financing.
Now, this may be a new term for many. Well, our guide will give you a bird’s eye view about merchant financing, so that you can decide whether it is the right move for you or not.
Exploring the concept of merchant financing
Merchant financing aims to finance merchants. It is also referred to as a merchant cash advance. If you perceive merchant financing as a loan, then you are walking in the wrong direction.
What exactly happens is that when you seek merchant financing, then the financing company gives you cash, and you need to give a percentage of your daily credit card in exchange. The biggest issue that most startups face is that they do not have collateral in exchange for money.
When you go for a merchant cash advance, then it is a quick way to get money for your business. There are times when a startup does not have a good credit score, so merchant financing is an excellent option for such a business.
When you go for a merchant cash advance, then it automatically collects the payment through the credit card processing system, and this contributes to your ease at the end of the day. Now, let us look at how merchant financing works.
How does merchant financing work?
The merchant financing lender will make it a point to setup a system that can intercept the money that your business takes in through the credit card processing system. The system is designed in a way that it can take the repayments on a daily basis. The process is bound to continue until your merchant financing, and interest gets paid off.
The payment structure is designed in a way that it suits the merchant. For example, there are days when the business does well. When you avail merchant financing, then you have the opportunity to pay more on days when your business is going good.
However, there are days when the business does not do so well. You do not have to worry about this situation also because you can pay less on days when the business is not going good. The best part is that you do not have to pay a dime for merchant financing on holidays.
How to figure out the true cost of merchant financing?
The truth is that there is no definite way to figure out how long it will take to pay off merchant financing, so the time-based APR is not used to express this type of funding. On the contrary, merchant financing makes use of factor rates that uses decimal values to calculate the total cost of merchant financing.
Let us assume that you secure merchant financing of about $1000 at a factor rate of about 1.15. To calculate the cost of merchant financing, you will multiply 1000 by 1.15, and you will get to know that you will need to pay your lender $1,150 for merchant financing.
If you assess merchant financing through factor rates, then it may seem daunting, but the truth is that factor rates are a more straightforward method to calculate the cost of merchant financing.
Understanding the terms related to merchant financing
The first term that we will discuss is the merchant financing loan amount. It can range from $2,500 to $250,000. If you need a large loan amount, then merchant financing may not be the best option for you.
If we have to give you a general estimate, then you can find financial products that have a factor rate of about 1.14 to 1.18. There are also chances that you may come across higher factor rates.
You should be aware of the term holdback percentage also. What you need to keep in mind is that the higher the holdback percentage, the more money your MCA will take from your credit card processing system.
You need to have an idea about the additional fee also. There are some financial companies that charge an additional fee for setting up your merchant financing system. You need to talk it out with the company so that you do not have any surprises coming your way.
Now, the question is how you can secure merchant financing. We will look at the eligibility criteria for securing merchant financing.
Eligibility criteria for merchant financing
If you want to seek merchant financing, then it is essential to be in the business for at least a year. It is also essential that you should have a yearly revenue of about $50,000. You need to have your business tax returns and credit card processing statements also.
Why you should seek merchant financing
As a business owner, you need to be aware of the perks of opting for merchant financing. It will not be a challenge for you to qualify for this type of financing, and this is one of the main perks of merchant financing.
What most lenders want is that you should be performing a high number of credit card transactions, and as long as you are doing this, they are ready to grant you the money.
What most borrowers worry the most is that they may miss out on their repayments. The good news is that such a situation will never occur when you go for merchant financing. The reason is that payment automatically gets deducted. Plus, you will not have to worry about the late fee also.
The reason most businesses worry about capital is that they are not willing to pay a huge interest amount to their lenders. However, with merchant financing, you do not have to worry about the interest rates. The reason is that since the payments get deducted automatically, the lenders do not have to worry about the returns.
Due to this reason, they do not charge a high interest amount from the borrowers. On the contrary, long-term financing will turn out to be a more expensive option.
There are some essentials that you need to remember when opting for merchant financing. The truth is that only a percentage of your cash flow will get deducted on a daily basis, but you will still need to plan things in a way that you can manage those daily returns without a problem.
How to go about merchant financing
If you have made up your mind to go for merchant financing, then let us tell you how you need to proceed with the process. Most of Merchant financing companies have online websites so you can apply for a merchant cash advance through the site.
The first step is that you will need to fill out the online application. Secondly, you will need to provide all the additional documentation. The company may ask questions related to your credit card processing system, so it is essential to have all the answers.
The approval process is fast. Once your cash request gets the necessary approval, you will get the loan in two to five days. At the time of approval, the merchant financing company will give you details about the advance for which you quality.
They will give the details of the holdback percentage and factor rate also.
The fact of the matter is that merchant financing is an ideal option for businesses looking for a quick source of funding. However, you should always make sure that you get cash from a reliable merchant only.
The best approach is to check out the customer reviews of the financing company so that you are confident of the fact that you are seeking funding from the best source. Always put up questions to the financing company before taking the cash so that you do not have any surprises coming your way.
Secondly, make it a point to shortlist the best merchant financing companies. Next, you should analyze your requirements. Compare the features of those companies and map them with your requirements. The benefit of this approach is that you will be able to figure out which financing company suits your convenience.
Most of the reliable financing companies make it a point to offer live chat support also so that you can ask questions that come to your mind at the spur of the moment. It is essential that they should have satisfactory answers to your questions.
If not, then you should never trust such a company. When you make up your mind to choose merchant financing, make sure that you ask them about easy renewals also. The advantage of this process is that you will not need to look for new lenders every now and then.
If you want to take your business to the next level and are in urgent need of cash, go for merchant financing. When you make payments on a daily basis, then you will not feel overburdened also, so go for it right away and buy your peace of mind.
