How Merchant Cash Advances Are Transforming Small Business Financing
The world of business financing has changed radically in the last ten years. Where once banks had a monopoly on business loans, and the promises they made returned a laughably small set of viable options for business owners, these proprietors today enjoy access to financing sources that were practically unimaginable just a few years ago. Gone are the days of submitting reams of paperwork, enduring the months-long waiting process for approval, and receiving rejection letters that only served to douse their entrepreneurial fire.
The conditions that define the world of small business do not necessarily fit well within the guidelines imposed by lenders used to dealing with large corporations. Business such as restaurants may need to increase their cash flow before the coming summer tourist season. Or they may discover a one-time purchase opportunity in the local wholesale market that requires immediate payment. These changing conditions require agility in making financing decisions and speed in obtaining funds to meet emerging opportunities.
The Growth of Alternative Financing
Business owners are empowered by the discovery that they can turn to other sources of financing in the absence of approval from traditional lenders. These sources have streamlined the decision-making criteria attached to traditional loans. Financing sources outside banks offer a flexibility that every small business needs but that established lenders cannot offer. These alternatives recognize business cash flow and daily sales figures as more trustworthy indicators than tax returns with two-year-old data.
A growing number of businesses are taking an advantage of the Merchant Cash Advance, which differ from customary financing agreements in a number of material ways. Instead of fixed loan payments each month irrespective of sales performance, the money that flows back to the lender is based on those businesses’ daily sales totals. After each credit card and debit card transaction, a small percentage is automatically taken from daily sales figures to repay these short-term advances. The advantages inherent in this business model allow repayment figures to naturally scale alongside improved or declining sales figures.
The Value of Time in Business
In business, timing is everything. If a busy competitor gets there first, the small patisserie hoping to capture a steady stream of tourists may miss out on that coveted downtown location. The wholesaler passing on an exceptional, bulk-purchase opportunity whose acceptance is time-sensitive will not wait until next week to hear from you. Traditional banks that commit to a lengthy loan approval process might take as long as 30–90 days before disbursing funds after approval. These timeframes are unacceptable when an offer on the table has to be accepted by the end of the day.
Alternative funding sources have shortened their assessment processes and now allow business owners to make applications online in minutes. The approval process follows quickly, often within a matter of hours or a few days rather than several weeks. Many companies can expect that once they receive funding approval, they will have cash available within 24-48 hours. Alternative lenders have adapted their practices to suit the pace of the twenty-first-century business world. This speed creates flexibility that lets business owners seize opportunities while their profitability is still assured.
Understanding Costs
Accessing financing quickly comes with caveats. Alternative funding options cost businesses more than traditional banks offer when considering total fees or the implied interest rates behind the financing they provide. But many business owners have realized when weighing the cost of capital against its value that money is not necessarily available when needed.
An opportunity that passes business by might be worth missing out on, but the resulting cost could be far more than the fee charged by alternative funding source. Consider an example: The business owner knows that failure to purchase equipment now might mean losing another $10,000 per month in cash flow for the rest of the year. In this situation, the 15% fee charged by an alternative funding source appears like small change after doing the math: a one-off payment of $1,500 compared to waiting three months for a bank loan. The case used in this example shows that conversion is necessary regardless of circumstances, even if costs differ in other situations.
Qualifying Companies
Companies with high and predictable credit card sales figures are most likely to benefit from a pattern of repayment that depends on daily sales transactions. Restaurants, retailers, salons, and other businesses with regular practices in this area are well-established candidates for Merchant Cash Advances and similar arrangements with alternative funding sources. Business owners don’t have to remember when repayments are due or manually ensure their payments are made—everything is automatically handled by the same system that recorded their sales.
The flexible practices of alternative funding sources have made it easier for companies who may not yet be established long enough for traditional lenders. Banks prefer businesses with two-to-three-year-old tax returns and excellent credit ratings. Instead of these rigid criteria, alternative lenders look instead at current performance and potential in their consideration of repayment patterns and lending decisions. A business that has only been running for six months but demonstrates high daily sales figures could well qualify for funding assistance that most banks would deny outright.
Companies in Atypical Markets
Flexibility is built into Merchant Cash Advances and other similar financing arrangements commonly available through alternative sources. This flexibility is beneficial for companies working in markets where their income may fluctuate; seasonal businesses remain particularly well-suited to alternative loans with repayment periods tied closely to actual business volumes.
Business models such as ski resorts rarely make money outside their busy winter seasons; banks might expect these companies to make equal payments irrespective of their income. By contrast, arrangements that reflect more realistic repayment amounts will align with company expectations from lenders.
Companies looking for flexibility in loan repayments who are also uncertain about the viability of their businesses will benefit from alternative lending options more than existing companies with traditional banks who expect low failure rates.
Adopting repayment methods scaled according to sales generated also relaxes company owners during periods when their income may drop predictably compared to busier periods.
Making Informed Choices
Many changes over the past few decades have made it easier for business owners to control their future growth by choosing between different financing arrangements. Repayment contracts of varying lengths and company requirements vary, so it is essential to compare available options carefully.
The variety of financing options available today would have seemed ridiculous not so long ago. Instead of being at banks’ mercy, company owners have real choices about how, when, and why they want to obtain goods or services they may depend on. For these entrepreneurs building their empires in real time every day, times have changed. Yet closing or narrowing these gaps and creating more equitable conditions for all involved may be aiding those whose entrepreneurial spirits bring them trouble instead of profit.