Merchant Cash Advance

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Merchant Cash Advance
Merchant Cash Advance
Merchent, Advances
Other Names:
MCA, Merchant Loans, Credit Card Cash Advance Loans, Credit and Receivables Financing.

Merchant cash advances are an alternative to traditional bank loans used by many small businesses. Under this arrangement funders provide the business owners a lump sum in exchange for a percent of the companies future credit and debit card sales. Although merchant cash advances are more expensive then bank loans, they are often used by retail businesses that can not meet the exceedingly strict requirements of regular lenders.

An average merchant cash advance is approved within 4 days and only requires the last four months worth of the businesses credit card statements. Credit score and line of credit are not factors when it comes to a merchant cash advance approval. A lump sum for the agreed advance is generally transferred to the merchants account within two weeks of the applicants approval. Payback of the lent sum is normally done by an automatic deduction of a set percent from all future credit card transactions processed by the business until the cash advance has been paid off.


[edit] Alternative to Business Loans

Technically merchant cash advances are not a loan, they are a sale of the companies future processing receivables at a discounted rate. Merchant cash advances are typically used by small businesses that do not qualify for bank loans.

[edit] Advantages Over Bank Loans

Popularity of merchant cash advances is a direct result of the advantages it has over traditional bank loans.

  1. High Acceptance Rate - Most small retail business have no collateral or do not have good credit and would get rejected by standard institutionalized lenders.
  2. Ease and Speed of Application - Much less paperwork then required by banks.
  3. Payback Rate Fluctuates With Income Daily Level - This gives the merchant ability to keep their cash flow free during slow seasons of the business. As apposed to fixed payments required by business loans regardless of how profitable the month was. With a merchant cash advance there is no set due date on the loan and it is only repaid when sales come in.

Need it for buying inventory, expansion and renovation. Loan amounts are almost always lower then less than $150,000.

[edit] Percent of Interest

Merchant cash advances are more expensive then bank backed business loans and the borrower must repay anywhere between 25%-100% over the lump amount that was given to him. Since cash advances are not officially a loan, funders are not bound by usury laws that would normally limit the interest rate they charge. This would normally be an equivalent of a 50% APR on a normal loan.

[edit] Controversy

Some people claim that merchant cash advance providers are in reality regular lenders just disgusting their loan to bypass the usury laws that limit the interest lenders can charge in many states. A federal class-action lawsuit has already been filed against a large cash advance provider for overcharging the permitted interest rate and another provider had to settle a lawsuit for $20 million. Merchant cash advance providers are fast to point out that they do take any collateral or personal guarantees and assume the full risk if the business fails. That draws a strong distinction between themselves and regular lenders

[edit] Payback

Payback is normally done within a year of the cash advance. Under most circumstances the lender takes 20% - 25% of each credit card transaction until the amount of the loan and interest is fully paid back. Since cash advance providers try not to choke the business in thinner profit margin industries they take a much lower percent of the sales averaging at 9% and going as low as 1% in extremely thin profit stores.

[edit] Switch to Associated Credit Card Processor

By taking a merchant cash advance loan the borrower agrees to use one of the lenders partner credit card processing companies. A borrower is normally given a choice of 3-4 credit card processor to chose from. If he is not already using one of them he must switch over. This is done as a security measurement for the lender who now has the ability to monitor all the borrowers credit card transactions and is guaranteed a hassle free collection of the designated payback percent of the sales. At the same time merchant cash advance funders take an affiliate commission from the credit card processor for getting them a new client.

[edit] Repayment Methods

There are three accepted repayment methods in the merchant cash advance industry.

  • Split Withholding -
  • Trust Bank Account Withholding -
  • ACH Withholding -

Some real payment figures $42,600 for $59,788. $20,000 for $27,000. $73,000 for $109,500

Rules and Regulations

They can not encourage customers to pay in cash, for example, and they cannot switch credit card processors

[edit] The Merchant Cash Advance Industry

Industry began around 1998. It has grown significantly since 2007 and had over 50 active lenders as of 2010. This can be estimated as a minor 10% saturation of this potential $10 Billion lending market. Recent rise of industry is directly related to the global economic hardship at the time. Industry was pioneered by AdvanceMe in the late 1990's. As of 2010 there were no official regulations on the industry but most cash advance providers were with the realization that if they would not regulate themselves and their interest rates eventually the government would step in and force regulation.

Renewal of cash advances are very easy and once a business has proven itself the providers are fast to issue out a second round on the loan. One large provider announced that three out of four customers renew their advances.

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