While merchant loans have been heavily criticized by traditional lenders, they offer a convenient way for small businesses to obtain the capital they need when banks are turning them down.
Opponents of these new forms of business financing claim that they are nothing but loan sharks that are praying on desperate business owners while charging exorbitant fees. In many cases fees that compare to 200% or more in traditional interest rates.
Proponents say that you can't compare them with traditional loans. Merchant lenders rather advance cash in return for a share of future credit card charges. By only collecting a fixed portion of monthly credit card sales business owners don't need to worry about having to pay back the loan when the business is slow. But when business is better than the loan is paid back faster.
So how does it work. Let's say you are a small business owner that runs a dry cleaning business. You find yourself in a situation that you urgently need a loan of $20,000 to cover working capital needs. Banks have turned you down, as they only tend to lend money when you are flush with cash and you don't need any. In times of need it is almost impossible to find a traditional loan.
So what are your alternatives? If you would invoice your customers, you could try to find a factoring company and sell your accounts receivables to them for a discount. But as you deal mainly with walk in customers that pay you by credit card, that is not an option for you. This is where the merchant lender comes in.
By looking at your average monthly credit card sales, they will determine an amount that they can advance you. In your case the lender is advancing you $20,000, he charges a fee of, let's say 20%. So you will pay back $24,000 through your future credit card sales.
The advancing company has a vital interest to make sure that you can retain enough of your monthly sales to ensure that your business stays healthy. They in a sense are now in the same boat as you are. Typically the lender would try to limit the percentage they would take of the top of your monthly sales to no more than 10%.
Of course they will also benefit if your business is doing much better thanks to the additional cash you have available. If you double your monthly sales you will pay them back in half the time. Your fees and costs stay the same. Quick turnaround is in the best interest of the lender and you as well.
But that holds true for the opposite as well. If sales are slowing down and it takes you much longer than expected to pay back your loan. The return of the provider drops.
In summary, you can say that merchant loans are a valuable addition in the toolbox of small business owners to gain easy and convenient access to capital when needed.
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merchant loan is a great way to inject working capital into your business, when you need it most. Unlike traditional finance,
Merchant loans are very flexible and can be used for any business purpose.
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