Merchant Cash Advance and the Question of Small Business Financing

small business financing

Running a small business in the present times can be very challenging. More than ever before, obtaining small business financing has become quite a major issue that is seriously affecting the survival and growth of small business in the United States. It has been said that an estimated two-thirds of small business start ups do not survive the first five years of operation. It has also been alleged that a significant amount of businesses which survive the first years also fail to exceed ten years. The reason for this high rate of failure among small businesses has so much to do with the seeming difficulty with which small business owners have access to loans and other credit facilities. Indeed, there has been a gradual decline in the number of loans offered to small businesses and startups by commercial banks.  Since the recent economic recession in the United States, banks have become more wary of lending to small business because of the high risks associated with doing so. For it is well known that firms that have obtained small business financing have a high probability of defaulting on payments.  From the viewpoint, if the small businesses, inability to repay loans is nothing but a reflection of how difficult the business terrain is for them.

Nonetheless, commercial banks and other traditional financial institutions remain skeptical of small businesses in general. Meanwhile, these businesses are unable to meet the rigorous requirements often set by banks as a condition for receiving loans. Before commercial banks grant small business financing in the form of loans to small firms, an evaluation is often in order to determine the creditworthiness of the firm. To this, they require the business to have a solid business plan and to have a strong and consistent cash flow. But these requirements are quite difficult to meet. Let us take for example the issue of collateral. As an integral aspect of commercial bank loans, collateral is required to provide security for the lender in the event that the borrower defaults. Collaterals are meant to be, at least, of the same value as the loan and could be in the form of real estate. However, small businesses are not usually to provide the much-needed collateral and as a result, remain excluded from commercial bank loans. Because of this, small business owners are becoming increasingly reluctant to approach commercial banks for small business financing.  So they have generally shifted their focus to other nontraditional sources of business funding—and this is what shall form the remaining part of this piece. In particular, we shall dwell on merchant cash advance as it is the most popular option.

Understanding what merchant cash advance is all about

A merchant cash advance is a commercial transaction in which a business that accepts credit card payments agrees to sell its future credit card receivables to a merchant cash advance provider in order to obtain a lump sum of cash. This method of obtaining small business financing has sparked a lot of interest both within and outside the business circle. Presently there is so much confusion on what merchant cash advance really is and in what way it is particularly different from a loan. Much of the controversy stems from the fact the merchant cash advance industry is a largely unregulated one. This means that regulations which oversee loan transactions between a business and a traditional lending institution such as a commercial bank do not apply to merchant cash advance.  In fact, merchant cash advance transactions are regarded by the judiciary as a business to business transactions and not business to customer transactions.  The instances of small firms obtaining small business financing from merchant cash advance providers have been on the increase in recent times. A report showed that in a one single year non traditional lenders of which merchant cash advance providers are the leading figures issued more than 4 billion dollars as loans so to say to small businesses.

What qualifies a business for a merchant cash advance?

Before looking at the process of how obtaining small business financing from merchant cash advance providers, we shall first take a look at some of the general requirements that would make a small business eligible for an advance. First, most merchant providers will often make it a core requirement for the business to have been in operation for a period of at least one year, but there are new merchant cash advance providers that are springing up that can accept businesses that have been in operation for as short as 3 months. Another common requirement is for the business to have a physical location; that is to say those online based businesses are generally excluded from receiving a merchant cash advance. In addition, the business seeking the advance must accept visa and master card payments otherwise it cannot receive small business financing from merchant cash advance providers. In addition, the merchant is required to have monthly credit card sales of at least $5000, although some new firms accept way less than that. Once these requirements have been met alongside other ones which the individual merchant cash advance provider might require, the chances of the obtaining the advance are quite high. In short, it is the high approval rate of MCA loans that is one of the main reasons small businesses opt for it.

The basic process of obtaining a merchant cash advance

The process of obtaining small business financing from merchant cash providers is quite a straightforward one. The first step is for the business owner to the merchant cash application for from the merchant cash advance provider, although some of these forms can be filled online these days. The merchant will often be required to provide details of the total credit card sales of the business in per month and the mode with which it received such payments which has to be through credit and debit cards. Some few documents such as proof of insurance and federal tax identity number might be required to reassure the merchant provider of the identity of the business owners since there is no collateral security in the first place. Once the application has been completed, submitted, and reviewed, the merchant providers will often send one of its representatives to discuss the terms which bests suits the individual business. This is very important as the merchant cash advance needs to the peculiarities of a given business before deciding on such things as factor rate, withholding percentage, in order to ensure easy compliance to the terms of the small business financing loan.

How does the whole thing work?

First thing first a merchant cash advance is a form of small business financing in which a merchant sells its future credit card sales at a discounted price to the mca provider. This means that when a merchant requests a particular sum of money from a merchant provider, the latter usually multiplies the sum by a given factor that does not often exceed 1.5 in order to account for the discount in the sales. This factoring yields the total amount that is to be repaid by the merchant. The merchant also agrees to the merchant cash agreement that must be signed that a fixed percentage or amount of the daily credit sales of the business is to be remitted to the merchant provider. This process of remitting funds continues until the cash advance has been fully repaid and afterward, the merchant provider loses its entitlement to the future receivables of the business. In remitting the funds to the provider, the merchant is able to choose between having a fixed percentage of, or a fixed amount from, its daily sales. The method of fixed percentage makes for payments that vary with prevailing business conditions, while the fixed amounts method ensures that the same amount is paid at all conditions.

Benefits of using merchant cash advance

The number one thing about merchant cash advance is the speed with which funds can be obtained. It can take as short as one week to obtain small business financing from a merchant cash advance provider and this also includes the time taken to process the application. Furthermore, the documentation that is required by most merchant cash advance providers is often minimal. In most instances, only the cash flow statement of the business for a couple of months is required in order to establish the creditworthiness of the business owner.  Above all, there is no risk of a personal loss to the business owner; rather it is the merchant cash advance provider who stands to lose his whole investment if the business should fall into hard times and fails, or if it is just unable to repay the advance. However, merchants always agree not to engage in practices that seek to intentionally deprive a merchant cash provider of his due.


Regardless of the issue of cost which is associated with obtaining small business financing through merchant cash advance, an increasing number of small business owners are embracing it as a good alternative to bank loans. Of course, such individuals realize that the benefits of merchant cash advance more than compensates for the cost. In a nutshell, merchant cash advance remains a great source of finance for small businesses.


Leave a Reply

Your email address will not be published.