If you’ve been paying attention to trends in small business financing option, you’ve probably heard of merchant cash advances. There’s a lot of misconceptions and misinformation that’s surfaced regarding these products. Some people have raised concerns regarding the legality of this option. This article will explain the features of merchant cash advances and how they stack up to other options for small business financing. It will also answer the question regarding their legality.
Merchant cash advances technically aren’t loans. A merchant cash advance is a loan based on future credit sales. The loan amount is determined by the merchant’s history of credit receivables. The business obviously must have a reasonably acceptable history. This means that they must also have a good track record as far as credit receivables. Chargebacks, returns, and several other factors go into assessing the business’s risk level. The loan is underwritten in a rather quick amount of time. This is because merchant cash advances aren’t subjected to typical lending guidelines. This is because they’re not actually being secured by any current or tangible asset.
Business owners like merchant cash advances for several reasons. They offer many small business owners the ability to borrow more freely. Many small businesses aren’t able to qualify for traditional loans because their business is structured as a sole proprietorship. With these businesses, the owner is typically risking personal assets if the business fails. In turn, they end up borrowing using their own personal credit. This is typically frowned upon; however, it’s a reality of owning a small business. They’re typically also unable to borrow based solely on business credit because they’re unable to establish a reasonable credit history. This creates a cycle of the business constantly being intertwined with the owner’s personal finances. Merchant cash advances allow the business to use its own sales as the source of repayment. The owner is even able to defer the bulk of the payment to a future maturity date. This is highly beneficial to businesses that are new but expect a spike in revenue in the coming months. This is especially true for businesses that are seasonal in nature.
Merchant cash advances also provide quick funding times as previously mentioned. This can be a highly influential deciding factor in favor of using a merchant cash advance. Many small businesses experience unexpected expenses that aren’t figured into the business plan. This creates an immediate need for cash as these expenses often can’t be deferred. Again, since the business is unable to secure traditional loans, they turn to the option of a merchant cash advance. Emergency expenses can also affect a small business of any age. Should this happen, a merchant cash advance can be critical to a business’s survival.
The legality of merchant cash advances is suspected to be questioned for several reasons. Many banks and private lenders could potentially see this service as a threat to their revenue. These companies also may feel that the merchant cash advances should be subjected to the same laws and regulations as their products. Obviously, the merchant cash advance business model is perfectly legal. Many businesses are currently using and enjoying the benefits that these products offer.
While merchant cash advances provide a necessary service to small businesses everywhere, they certainly come at a premium. Since the products aren’t regulated by the same laws as traditional business lending products, the cost can be much higher. Many businesses, however, don’t see this as a deterrent. The benefit to them outweighs the potential negatives. Since these products aren’t heavily regulated, it makes for stronger competition between the merchant cash advance providers. This creates another benefit to the businesses that use the products. With competition come more products at a much lower cost.
Regardless of the current economic climate, most people would agree that this should be an option that remains available to small business owners. The business owners are able to cover expenses and continue on as usual. Although cost is a factor that’s raised a valid concern, businesses are free to shop around among vendors to find the best deal and product for their company. Merchant cash advances will certainly be a topic that will be very prominent in the coming years. It’s certainly a topic worth keeping an eye on.