The merchant cash advance lending industry is one that is specifically intended to help small business owners. That is pretty important since small businesses are increasingly finding it challenging to acquire financing. Small businesses need to have access to funding because they are responsible for hiring almost two-thirds of the American population.
Previously, small businesses relied on traditional financing institutions, mainly commercial banks, to obtain funding. However, the situation is pretty different nowadays. During the last year or two, more small businesses are being funded by alternative lenders. Merchant cash advance loan providers are typical of such alternate lenders. As of this moment, they have put in billions of dollars for funding small businesses.
The reason for the shift towards alternative lending
The option open to a business looking for a business loan help a few years ago after being declined with a commercial lender was often quite small. Generally, a business received access to credit cards or microloans. However, the emergence of merchant advance loans has changed and exposed a completely new alternative for business owners. However, the reason behind the unexpected transfer towards different lending should be accounted for in one way or the other.
The financial downturn and increased government oversight
It’s been observed that small businesses seeking business loan help of less than a million dollars are being denied. A written report by the federal government deposit insurance loan applications to commercial banks that are under the said sum has been declined consistently annually since the economic crisis. It was also projected that the current amount of funding to small businesses is 20 percent significantly less than what it was before the economic collapse.
Strangely enough, however, loans above one million, which often go for big corporations, are issued on a more consistent basis. One U.S. state saw a drop in commercial bank lending to small businesses through the SBA or small business administration by as much as 60 percent between 2007 and 2013.
One even experienced just how loan applications were being declined and supposed that around 8,000 requests for business loan assistance were getting rejected every day. Do you ever marvel why small businesses quickly turn to merchant cash advance loan providers right after the opportunity has presented itself?
Issues at the smallest level
With the micro level, a big part of small businesses is yet to be recovered from the effects of the economic downturn. The implication of the revenue of the businesses involved, credits, and collateral is probably not able to support requests for business loans to assist in almost all of the conditions. Even in areas where community banking institutions used to be in charge of a significant part of the lending, the problem has been quite definitely different.
A number of the community banks have sealed or are consolidating, therefore, of the financial meltdown. Merchant cash advance loan providers are, on the other hand, gaining more steadiness each transferring day. Therefore, better positioned to provide economic assist with small business owners.
Yet another reason that may have been responsible for the switch towards alternative lenders for business loan help is increased authorities regulation. Commercial banks are now more seriously regulated than was the circumstance in time past before the economic downturn.
Such legislation makes it more expensive for banks to process smaller and riskier funding, especially those heading to small businesses. Due to all of this, it appears unlikely to many that the banks will need the main spot they once possessed on the problem of small business lending. This, of course, leaves the entrance open to vendor cash advance loan lenders.
How does vendor cash advance work?
Merchant cash advance lenders offer business loan help to small businesses but not very much the same as commercial banks or other traditional financial institutions. To provide financial assistance to a business a merchant vendor offers to buy a portion into the future bank card sales of the business at a low price. In case the business agrees to the offer. It also agrees a particular portion of its daily bank card sales is to look at the merchant advance loan lender towards the repayment of the move forward. All things being identical, the business is always on the make daily repayments until the progress has been repaid.
Basic principles of any merchant advance loan transaction
The agreement between a merchant vendor and the business in search of a business loan assistance features a few of the overt principles of a merchant cash advance transaction, including the factor rate, the payback amount, as well as the charge-back percentage. Still, there are other implicit agreements in the agreement. For example, a business commits to a set percentage of its daily sales to repay the advance. This happens while the lender agrees that there isn’t a set time for the repayment.
This means that as long as the business is faithful in paying the agreed 10 percent, for instance, no matter how long it takes to repay. The fact that the transfer is a sale and unsecured also means that if the business fails, the merchant is not prone to repay the business loan help through personal investments.
Most of all, because what occurs in a merchant cash advance loan is a commercial transaction, the lender merchant isn’t expected to record company performance to credit reporting agencies. If both sides honor many of these points, the result is a seamless exchange involving two business entities.
Small businesses will most likely choose to seek business loan help from merchant cash advance loans because it saves them time. One can only imagine the reprieve the small businesses feel knowing that they can obtain funding in just a matter of days or even hours, depending on the situation.
Also, though merchant cash advance is relatively more costly than regular loans, the benefits associated with it, such as high approval rate has empowered small businesses to trust it. And regardless of the many challenges, the merchant cash advance loan industry has managed to remain stable.