What is merchant funding and its benefits? How does it work?

A merchant funding is a business loan through a merchant financing lender that offers a lump sum. Merchant funding works by the lender collecting a percentage of the merchant’s credit card sales until the loan is fully repaid. The benefit of merchant funding is that the merchant gets immediate cash to operate the business.

Author: Brad Nakase, Attorney

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Merchant Funding Example

Laura is the owner of a clothing boutique that sells vintage dresses, shoes, and hats. After spending money on payroll to hire employees, Laura would like to increase her inventory as well as update the shop’s appearance. She is considering getting a merchant cash advance because her business processes a lot of credit card transactions. Making about $5,000 a month in credit card transactions, Laura hopes that she meets a provider’s requirement. Because Laura mainly supplies clothing for fall and winter, the spring is often a slow period for her business. She likes how with merchant funding, the withholding amount is less during slow sales periods. This funding option fits her retail business best.

What Is a Merchant Cash Advance and How Does It Work?

A merchant cash advance is different than a term loan because its remittance changes depending on the business’ sales patterns. After all, businesses have their good and bad periods. There may be a few months of the year where sales are skyrocketing, and another few months where they are very slow. Of course, a business owner will not be able to remit the same amount during fast and slow periods. When sales go down, a business owner will need to cut expenses in order to keep operations running.

For this reason, when a business owner looks into funding from a merchant cash advance company, there is usually a holdback percentage. This is a defined percentage that is withheld from a business owner’s credit card transactions until he or she fulfills their obligation. This means that a specific percentage of sales from the business bank account will be used for remittance rather than being held to a set payment quantity.

This is popular among many business owners because there is no defined schedule for repayment. This means that business owners have the flexibility to remit their cash advance in line with the ups and downs of their sales. When a business’ sales are doing well, then the holdback percentage will be a higher dollar amount. Alternatively, when sales are going through a slow period, then the holdback percentage will be a lower dollar amount.

What Businesses Benefit from Merchant Funding?

Certain businesses may benefit from merchant funding more than others. In general, merchant cash advances are especially helpful to business owners in the retail, restaurant, and service industries. This is due to the nature of these industries; the fact that they usually process a high volume of credit card transactions. Companies that do not accept credit cards or receive these transactions only rarely will not typically qualify for merchant funding.

If a business owner runs a company that mainly accepts credit card transactions, then it may be beneficial to obtain a merchant cash advance.

How to Apply for Merchant Cash Advances?

Usually, a merchant cash advance provider will require an applicant to fill out an application, as well as submit certain documentation. This paperwork may include a few months of credit card statements as well as bank statements. Sometimes, a provider may ask for tax returns, a balance sheet, or a P&L.

If a business owner is in need of a cash advance as soon as possible, then it is recommended to collect these documents before completing the application.

Merchant Cash Advance Requirement Details

Prior to applying for a merchant cash advance, a business owner will need to understand how to qualify for a specific provider. For instance, a merchant cash advance provider may ask that the business be operational for at least six months. Having been open for a period of time already will increase the likelihood that the business will make use of the merchant cash advance.

Another funding requirement may be that the business makes a certain amount in credit card sales every month. For example, a business may be required to make $5,000 in sales. If a business makes less than this minimum, then it may be difficult for it to qualify for that provider’s merchant cash advance. If fulfilling this requirement will be too hard for a business, then it is not worth risking the future of the company for the advance.

A business interested in a merchant cash advance should also not have any open or dismissed bankruptcies within the past year, or some other predetermined period of time. If a business does suffer from these problems, it should endeavor to take care of them first prior to applying for a merchant cash advance.

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