It opens doors to the financial world for many retailers. The merchant cash advance industry is growing at a staggering rate. This growth is due to traditional banks not meeting the needs of small businesses.

This product is very unique. It is a purchase of an asset, not a loan, so we have to use specific language consistent with the purchase of an asset, such as the recovery rate and the discount rate rather than the interest rate. It looks a lot like factoring, but it is a sale that has yet to be made.

A cash advance provider gives merchants a lump sum cash advance up front. In return, merchants agree to refund the principal and fee, giving the company an agreed percentage of their credit card sales until their balance is zero. This percentage is between 12% and 24%. The repayment term is only 5 to 12 months.

Merchants generally must use the vendors' credit card processor because the advance is automatically returned as a percentage of the proceeds of each batch. A small number of commercial cash advance companies do not require the merchant to change credit card processors. So if this is a problem, be sure to ask the commercial cash advance company you are thinking of working with.

Cash advances are very different from traditional financing programs. In essence, merchant cash advance providers purchase a small percentage of future MasterCard and Visa income, and the merchant repays it as a daily percentage of that income.

Obtaining cash from traditional financial institutions can be difficult for some businesses, particularly retailers, restaurants, franchises, or seasonal businesses. Credit card processing is most often used by these merchants, so merchant cash advance programs offer a number of benefits.

Why do merchants like it?

Cash is usually available more quickly than with traditional loans. These programs are especially attractive to retail and restaurant traders, not only because these types of businesses are rarely able to obtain traditional financing, but also because of the immediate liquidity.

Most cash advance providers advertise that cash can be available in about 10 days. Unlike a loan with a fixed interest rate, the amount owed and the due date set each month, with the merchant cash advances, the money is returned as the credit card receivables come in.

Merchant Cash Advance programs are conducive to cash flow, especially during slow seasonal periods. Traditional loans and leases require a fixed payment each month, whether the business has made a sale or not. Because payments are calculated as a percentage of sales, if sales are growing, payback could be faster, but if the owner experiences a business interruption or downturn, the payments will be lower.

In most cases, business owners do not offer a personal guarantee or personal guarantee.

How Suppliers Make Money

Finance charges can vary widely, not just from one provider to another, but from one advance to another. For example, the funding range for a $ 10,000 advance could be as low as $ 1,500 or as high as $ 4,000. That is a 60% difference.

There is no fixed interest rate; the effective interest rate varies by business. If the merchant's business is doing well and sales increase, the prospective supplier collects the money sooner and the interest rate is quite high. Since there is no time limit for repaying the loan, the effective annual rate decreases as the payments are spread over time, although the cash provider generally forecasts a fairly short payback period, usually less than a year.

Author's Bio: 

The nature of the merchant cash advance product requires that business owners have a positive need for this alternative financing product.