Some experts predicted that the merchant cash advance would grow into a 10 billion dollar industry as credit restrictions tightened in the past several years. How do you choose between companies when literally thousands of providers turns up with a quick search for merchant cash advance? Here are a few basics on how merchant advance transaction works.
1. You must already be established: Most providers have time requirements on how long you have been in business, how long you’ve accepted credit cards and how long you’ve maintained sales volume. This means you must have a business with a credible financial history with a few thousand dollars in accepted credit card sales from customers to get the best rates from vendors.
2. You must be approved first: One of the many reasons business cash advance is favored by so many business owners is because of the fast and easy approval process, but you should be careful though. Do not accept the advance terms or amount just because you got approved on the first try. There are providers who are unscrupulous in order to collect default fees and penalties, approving businesses that they know won’t be able to pay off the advance borrowed.
3. How service agreements work: The providers explain all the details once you have been approved. You would repay your advanced amount in daily automatic transfers from your merchant account at a set percentage of your daily sales as deemed “safe” to retrieve, including service fees until the advance amount is paid off. Watch out for:
• Repayments requiring a full balance payoff after a certain period of time
• Fees that sets in when sales volume drops
• Repayment periods that are extended or balloon
Merchant cash advance is not a loan with lending or usury laws, so providers can charge an arm and a leg to businesses with no alternative means of financing.
4. Repayment begins immediately: Just like a traditional loan, you start paying back as soon as you get the cash. Before you sign the service agreement, make sure your current sales volume can support the repayment.
5. Consequences if you default: If you cannot pay back the advance, provisions in the service agreement will govern your potential defaults. If you can’t repay the merchant advance provider as expected, make sure you know precisely what will happen. In some cases, companies have been known to place liens on business equipments, levies on you personal bank accounts, or withdrawal money straight from your business checking account, so be careful on giving out such information.
Terms that you can negotiate with providers
• Discounts: Going with a company you know and trust would be a better choice than going with a vendor you hardly know. Many credit card processing service providers also offers merchant cash advance services as well, you might be able to get better rates from your existing merchant service provider.
• Rates: Just like a traditional loan, the better your financial and sales history are, the better rate you will be able to negotiate with the providers. View vendors’ rating at Better Business Bureau to see if any complaints have been filed with the Federal Trade Commission. Get references whenever possible. You can also secure great rates by pledging equipment or bank account access as collateral, but you must be very careful with companies that require you to do this option.
• Repayment schedule: Repayment schedule is flexible just like rates, though be wary of daily/monthly minimum fees to your transactions that can add up.
Terms that are not negotiable with providers
• Application fee: Reputable providers won’t ask for it. There is no application fee.
• Existing terms: Unless you are prepared to seriously compromise, once you have signed the contract, you would not be able to negotiate out of terms, schedules, and fees especially. Be prepared to pay if you want to extend the repayment time.
• Merchant requirements: Merchants that accept credit cards are only eligible for merchant cash advance. Companies won’t accept you otherwise because they want a guaranteed automated method of repayment.