If you run a small business or have just started a new one, chances are you will face periodic working capital shortfalls. You may need funds for your daily business needs such as procurement of raw material or payments to suppliers. Your need for such short-term funds could be further intensified because of delays in receivables from large companies or due to seasonal fluctuations in sales. You have multiple options for funding such immediate needs. For instance, you might approach a bank for a working capital loan. However, banks normally do not lend to new businesses and also to those whose annual turnover is below a certain threshold. Further, the loan application procedure for a secured loan is tedious and a lot of documentation needs to be submitted. Banks also require collateral to be pledged as security that small and medium enterprises (SME) might find hard to source.
Another option is to choose an unsecured loan from a non-banking finance company (NBFC). Unsecured loans require zero collateral for security and are generally easier to procure. Several FinTech companies provide quick disbursal of such loans with a hassle-free online application process. Such loans require minimal documentation and are sanctioned within a few days. However, the lenders do look at the credit history of your business and that of its promoters. Also, the repayment instalments are debited through your business account and might prove to be a challenge for some businesses.
Merchant cash advance: Useful Alternative to Traditional Loans
Are there any simpler options that small businesses can look at for meeting short-term funding needs? Well, business cash advance is one such alternative that small businesses should consider, especially those that are new or those that do not have a good credit history or might have been turned down for a secured loan earlier. One of the most popular forms of business cash advance is the merchant cash advance. Most merchants today use card payment machines to accept payments from their customers. This offers tremendous convenience to both customers and the merchant as it eliminates the need to handle loads of cash for both parties. The recent demonetisation drive in India has led to the mushrooming of card payment machines across merchants and the current Union Budget also offers incentives for adoption of digital payment methods by small merchants.
A merchant cash advance allows a merchant to receive an advance payment from a lender against monthly sales from card payment or Point of Sale (PoS) machines. So, unlike a traditional loan, merchant cash advance funding is the purchase of a portion of future business credit card sales at a discount by the lender. Small businesses receive a lump sum amount in one go to meet their immediate payment needs. The merchant cash advance provider, in turn, buys the right to retrieve a portion of the business credit card sales each month, which is usually a fixed percentage of the total receipts. So, this method of business cash advance is different from traditional loans in the sense that it is an agreement between the lender and the merchant wherein the merchant agrees to pay the lender a percentage of his total sale receipts received through card machines till such period as the entire business cash advance, including the interest component, gets repaid completely.
Key benefits of merchant cash advance
There are multiple benefits of merchant cash advance as opposed to taking traditional loans.
No need to provide collateral or risk your credit rating: Whenever you take a commercial loan, your repayment history is recorded and in the case of default it can affect your credit rating for future loans. However, merchant cash advance is considered a sales transaction and thus is not included in the credit report. Also, merchants who take a business cash advance avoid the risk of losing collateral should there be any default in repayment of the loan.
Simple and straightforward application and collections process: When a small business applies for a commercial loan, lenders evaluate their financial statements, tax returns and business plans. However, merchant cash advance providers only look at the monthly credit returns and the period of time the business has been in operation. Typical requirements for business cash advance are generally very lenient and are easily met.
A small business gets quick cash: As the document processing requirements are low, merchant cash advance offers faster turnaround. Commercial loans can take months to process but merchant cash advance funding is typically available within a week of submitting the application. Such quick access to cash is beneficial when there is an urgent need to pay creditors, to pay salaries to new employees who have been taken on board to ensure business growth, or simply to seize a new business opportunity.
Approval rates are high: Merchant cash advance depends more on business performance rather than credit history of applicants. Such a practical approach allows lenders to forward business cash advance to promising businesses that are in the growth phase. One of the criteria that lenders consider is your average monthly revenue in the previous year.
Collection of payments depends on business revenue: A key point to note with merchant cash advance is that the lender takes only a fixed percentage of monthly sales. So, if sales are low for a month, the lender settles for a lower amount. Similarly, when sales are high, the lender makes up for the previous month’s shortfall by netting a higher amount. Thus business cash advance is unlike commercial loans, where a fixed monthly payment has to go to the lender regardless of the financial condition of the small business. Such a percentage-based method of payment collection actually allows a lender to support the business rather than draining funds when they are needed the most.
In the end, it suffices to say that while commercial loans are a valuable source of long term, low interest business funding, nothing beats the flexibility and innovation associated with merchant cash advance. The business cash advance provides small businesses quick and safe cash influx, and since the merchant cash advance providers collect only a percentage of returns, businesses avoid the pain of default during lean months.
