Merchant Capital Funding – A Boost for Small Businesses In Need Of Working Capital

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What is Merchant Capital?

To some of you, “merchant capital” may sound like a foreign term. Others may recognize it as merchant financing, merchant cash advance, or just cash advance. Essentially, merchant capital is simply working capital advanced to business owners for financing purposes. Lenders offer an immediate lump sum to the borrower in need. In return, the borrower pays the borrowed money back over time in addition to a fee.

Merchant Capital Funding – A Brief Overview

Merchant Capital Funding is a working capital advance provided to small businesses to help them cover day-to-day expenses. This financing option offers businesses instant cash in exchange for a business’s future credit sales receipt. On the whole, when a business opts for merchant capital financing, they sell their future credit card for immediate payment.

This alternative financing option is known by various names, such as a merchant cash advance, merchant financing, or cash advance. This type of financing option is usually used by seasonal businesses or those associated with cyclical sales and need cash flow during the sluggish time of the year. 

Here, a small business can utilise this credit facility when its sales are down to pay for operating expenses and wages. Conversely, small businesses can pay off the funds availed through merchant financing when their sales regain traction. 

Apart from paying wages and expenses, business persons can utilise this financing option to purchase equipment, hire new staff, expand the scale of operations, and acquire property, among others.

Challenges of Taking Traditional Business Loan    

The discussion regarding the importance of merchant cash advance is incomplete without focusing on the challenges of obtaining a traditional business loan. 

Traditional business loan lenders, especially those who provide loans without collateral, set strict eligibility criteria that small or new businesses with a low credit profile fail to meet. Also, the lenders demand an endless list of documents that most small enterprises lack or fail to produce. 

In such cases, small businesses either have to miss lucrative business opportunities that require substantial cash, or they have to sell their property or pledge jewellery to arrange a deficit amount. As a result, such small business owners look for alternative financing solutions such as merchant capital funding. 

How Merchant Capital Funding Works

When a small business person opts for a credit advance, the lender offers an instant lump sum amount on the basis of expected credit card and debit card transactions for the mutually agreed time.

Here, at the end of the agreed tenure, the borrower must repay the lump-sum amount and a fee. So far, the process of merchant capital funding and the business loan may seem to share similar features. However, numerous pointers distinguish them.

In cash advances, lenders ensure repayment by taking money from the respective business person’s future credit card and debit card sales. Therefore, by opting for this type of new credit facility, business persons allow merchant capital lenders to deduct an agreed-upon percentage automatically from their credit card or debit card sales.

In other words, when a business owner opts for merchant capital funding, his sales get reduced until he/she repays the lender in full. 

However, with traditional business financing, individuals have to repay as per the repayment schedule, which is usually done on a monthly basis and is less flexible.

Why is Merchant Capital Better than Traditional Loans?

  • Immediate Availability of Funds

Unlike traditional loans that take weeks or even months for processing, merchant capital disburses the required funds within a few working days.

  • Simple Processing and Minimal Documentation

If you have gone through the process of applying for a business loan at a bank, then you probably know that it’s a tedious and time-consuming process. A merchant capital, on the other hand, requires minimal documentation and the entire process can be handled online, with just a few clicks and within a few minutes.

  • No Need for High Credit Scores

A traditional business loan requires you to have high credit scores. Your credit doesn’t matter when you apply for merchant capital. All you have to do is show proof of your credit/debit card sales, and you get qualified.

  • No Need for Collateral

This is another huge benefit, especially for new business owners. Entrepreneurs and small business owners, especially those who are just getting started, are not likely to have sufficient business collateral. A merchant cash advance lets you borrow without submitting any collateral.

  • Flexible and Automatic Repayments

You don’t have to remember complex repayment schedules. In a merchant cash advance, the amount you owe is automatically debited from your daily credit/debit card sales.

Now, that you’re aware of the benefits of merchant capital, here how you can find the right lenders to avail merchant capital advances.

Difference between Merchant Capital and Business Loans

Thanks to the success and popularity of merchant capital loan, traditional small business lenders were forced to step up their game and offer fast and flexible loans in order to stay competitive.

The quickness of cash advances alongside technology helped disrupt the traditional financing industry and opened the doors for a relatively new industry of online lending. Online lenders offer a variety of services and financing options that resemble the ease and speed of a cash advance. The emergence of these alternative resources gives merchants like you a lot more resources for capital, cash flow needs, operating expenses and marketing campaigns. 

PointersMerchant Capital FundingTraditional Business Loans
CollateralZero collateral requirementCollateral requirement depending on the type of (secured or unsecured) loan availed. 
Credit ScoreCredit score is not needed.Credit score is needed.
Disbursal timeDisbursal takes a few working days. Disbursal time is relatively longer.
Repayment Flexible and automaticComplex
Source: KredX