Everything You Need to Know About Merchant Financing

In any business endeavor, financing can play a key role in the ability to grow. Merchant financing loans, otherwise known as merchant cash advances, are one way our company, ECS, helps our small-business owners acquire the capital they need to succeed.

If you are a merchant in the United States or Puerto Rico in need of quick cash, payment processing, or lending opportunities for advancements, investments, and even start-up funding, this article is for you. We will analyze your merchant financing opportunities in-depth and share tips to help you better understand this option.

What is Merchant Funding?

Many would assume that receiving loans could only be done through a bank or specific lenders. However, business loans through credit card processing companies are quite popular. A merchant cash advance is a funding option that a business can utilize to gain working capital fast.

Small to medium-sized businesses can benefit from merchant funding or cash advances as an alternative to traditional bank loans. Merchant cash advance financiers provide lump sum funds upfront to business owners. In exchange, the business’s daily or weekly credit card sales repay the advance at a fixed percentage.

Merchant Cash Advance Vs Small-Business Loan

With any business loan, lenders look at credit scores, credit history, and numerous other factors to approve their lending services. Whereas, merchant cash advances are a quick and easy alternative with no need for collateral, regardless of a business owner’s credit score.

With merchant financing services far less stringent criteria, merchants can escape the bureaucracy of in-depth loan systems. If an applicant has poor personal credit and little to no credit in their business portfolio, quality sales numbers can assist merchant cash advance (MCA) providers in determining a merchant’s reliability to pay back their advanced funds. The terms of the advance such as the amount, payback time, and interest rate are all valued differently per each merchant’s daily transactions.

Because of this, merchants can receive instant funding with credit history playing no factor in gauging credit worthiness. Because a merchant cash advance is not a loan, credit bureaus will not receive any reporting from MCA providers. Conversely, timely repayment of merchant cash advances will not play a role in building credit.

However, because merchant cash advances have flexible approval terms, they come at a higher cost. A merchant would need to decide if getting quick cash almost instantly outweighs a higher price tag than a standard loan.

Woman taking money out of a cash register

Benefits of Merchant Cash Advances

Merchant cash advances are extremely flexible. They can be used in several ways to support business owners in financial binds. Because MCAs can be easily accessed so quickly, they can be a good option for temporary working capital.

If there is an unanticipated decrease in cash flow, advanced funds can be used to cover expenses, payments due, increased operating costs, covering payroll, buying new working equipment and supplies, and any other needs.

Credit Card-Based Merchant Financing

Once you determine the amount of funding you need, you can apply for merchant service financing. Merchant service companies provide merchants with the tools and processing platforms needed to run credit card transactions.

Merchant financing through credit card processing loans is a great option if you are in need of a payment processing provider and quick cash. You may already have a merchant service provider that offers cash advances. If you need immediate funding, reach out to your current provider.
Ultimately, merchant services card processing and cash advance agreements are linked together. Merchant cash advances with credit card-based financing make repayment easy and automatic.
To repay a merchant cash advance, daily or weekly batch settlements will have a hold back applied at a fixed rate. Meaning, that a set percentage of a merchant’s sales is withheld from their bank account.

The fixed-rate percentage typically ranges between 10-20%. The higher the credit card transactions are for the day, the more funds are held back from settlement to the merchant, and the quicker the business’s cash advance is paid back.

Conversely, less money is withheld if the merchant makes fewer sales on a given day. For example, no fees are taken out if the shop is closed on weekends or holidays. During these periods, the advance will take longer to pay back.

ACH-Based Merchant Financing

If you need a quick cash advance, and you do not run credit sales, there are still merchant financing options available to you with ACH-based merchant financing.

With ACH-based merchant financing, your repayment is not based on your daily sales. Rather, you will be automatically debited from your merchant bank account via ACH. This option could be preferable as you can avoid the need to be able to accept credit cards or switch payment processing companies.

The merchant will know how much money will be debited at any given time with these types of repayment plans. This makes it easier to know when the balance due will be fulfilled.

Woman handing an envelope full of cash

Qualifying for a Merchant Cash Advance

Applying for a merchant cash advance is straightforward. Once you find a provider you prefer, you may be required to provide evidence of your driver’s license, credit card statements, bank statements, possible tax returns, and proof of your business’s income with your daily credit card receipts.

Most MCA providers have a high approval rate for qualifying cash advances. Businesses are not required to show years of experience in operation or even healthy credit scores. The ultimate determiner of a qualifying merchant is their number of credit card sales. If a business batches out a higher amount of credit card transactions, this ranks higher for a financier than credit ratings or the age of the business.

Can I Qualify for a Merchant Cash Advance with Poor Credit?

The beauty of a merchant cash advance is that even bad, little, or no credit won’t prevent a merchant from gaining the assets they need for their business. MCAs are not typical bank business loans. Financiers are more concerned with credit card sales as evidence for approval than with personal or business credit portfolios.

Merchant Cash Advance Advantages

Merchant cash advances have a few advantages that make money accessible to some business owners that otherwise may not be able to move forward in their business endeavors. This could be due to elements such as time, credit history, and difficult approval requirements. The value that merchant cash advances bring may outweigh those of standard business loans.

Quick Access to Cash

Merchant cash advances are one of the fastest avenues for merchants to access the cash they need. same-day approvals are frequent and funding is generally granted in as little as 24 hours up to 72 hours.

Automatic Repayment System

In standard business loans or lines of credit, repayment terms can become easily troublesome. Borrowers have to remember to pay back their minimum dues. Paying back these funds can oftentimes become time-consuming, forgotten about, or the borrower may not be able to afford the minimum payment or balance due. In the end, late fees and non-compliance can cause risky additional expenses to the borrower.

With merchant cash advances, payment is automatically deducted from daily sales that would have otherwise been deposited into the merchant’s bank account. With this system, the merchant never sees the funds hit their account. This convenience reduces the responsibility on the merchant to remember to pay back their dues.

Businessman showing a printout of a credit score check

Easy Qualification Regardless of Credit History

Credit plays no factor in a merchant’s advance approval. This is a huge benefit for merchants who need access to funds immediately but have an unhealthy credit score to positively gauge creditworthiness on standard business loans. The qualification also requires no collateral, other than future sales percentages.

Cash Use Freedom

Merchant cash advances afford business owners the freedom to use their funds at their discretion. MCA providers typically do not place stipulations on how the merchant is to use their funding.

Merchant Cash Advance Disadvantages

Merchant cash advances have their pros, making it the right choice for some. However, there are also a few drawbacks that may make you rethink if a cash advance is the right funding option for you.

Disruption of Cash Flow

With daily repayment percentages automatically removed from batch settlements, merchants may see a lack of profit. Oftentimes when utilizing business loans, some borrowers may opt to delay repayment to rearrange their cash flow. With the automatic repayment system attached to merchant cash advances, business owners are not afforded this option.

Costly Buy Rates

Because merchant cash advances require no collateral, no credit history, and no wait times to receive funding, the flip side is costly buy rates. The rates for an approved merchant cash advance can range between 40% – 350%. The more affordable option of a standard small-business loan from a bank would range from 3.19% – 6.78%. Business lines of credit can vary from 10% – 99%.
Person having a coffee checking their credit score on a phone screen

Credit is Not Built

Even with timely repayments, credit is not affected. Because financiers do not use credit for approval, they do not report payment history to credit bureaus. If a merchant is looking to build their credit profile, merchant cash advances will not offer this opportunity.

Unwanted Credit Card Processing Platforms

Agreeing to the right merchant cash advance can be tricky. When you agree to a credit-card-based advance you must be a merchant able to accept credit cards. To accept credit card payments, you must also sign a contract with an MPA provider that is a credit card processor. If a business owner is not careful when reviewing their contract, they may be locked into unwanted terms with a merchant processor.

How to Choose the Right Merchant Financing Provider

There are numerous MCA financiers to choose from. To select the right fit for your business, you can evaluate your options based on the following criteria:

Principal Amount Financing Limits

The first step you must take when looking into merchant financing options is determining how much cash you need. Different providers will be able to offer you more or less depending on how established they are as a financier. These amounts can range between $2,500 to $1 million. If the provider does not have the means to offer you what you need, you can move on to your next choice.

Payback Payment Period

The payback period is how long you have to repay the advance. This can range from three months to two years. The sooner you pay off an advance, the sooner you can get to making more profit for yourself. Keep in mind that shorter payment periods may result in difficulties yielding profit while you pay back your borrowed funds. You will need to factor in everything before knowing which payment period you will be able to afford.

Holdback Percentage

The holdback percentage is the fixed-rate percent of daily or weekly sales that will automatically be withheld from your credit card settlements. This percent will remain the same until the advance is fully paid off.

These fixed rates can range between 5%-20%. Higher holdback percentages may decrease the time it takes to pay off the advance, however, they may also negatively impact daily profit.

Factor Rates

Factor or buy rates are different from holdback percentages. These rates are the additional fees paid back on the principal amount borrowed. MCA providers may offer different buy rates for different merchants. These rates can range from 1.09 to 1.5.

If you have a 1.5-factor rate, you will pay back $1.5 on the dollar. For example, if you borrow $1,000, you will pay back $500 additionally, so the total paid back on a $1,000 advance with a 1.5 buy rate is $1,500.

These rates will vary based on the information provided on the application. Factors such as the age of your operation, your credit card statements, and bank statements all help the financier determine your potential risk level.

Mens hand grabbing cash being handed to him by a loan officer

ECS Merchant Cash Advance

At ECS, we offer our merchants and potential clients easy merchant cash advances to keep their businesses growing. Our underwriting and approval process evaluates the risk and credit worthiness of your account with your projected credit card receivables and daily credit card receipts with the evidence provided on the application.

This will determine the amount of money we can fund you and the time it will take to repay those specific funds. ECS’s merchant cash advances offer the following pros for your business:

Can I Get Out of a Merchant Cash Advance?

Getting out of a merchant cash advance is not always the easiest feat. The best way to end your cash advance payments is to pay back your principal and buy rate in full. This, however, may not be an option for some.

If you chose to apply for merchant financing due to a weak credit profile and realized soon after, the cash flow burden was too much to keep up with, you may be looking for alternative routes your business can support to fix your financial concerns.

One option to pay off your advance is to apply for an alternate financing option with a lower interest rate. In most cases, merchants opt for MCAs when credit is poor, which means finding an appropriate small-business loan may prove difficult still. Most small-business loans require a personal credit score of 650 or higher.

Additionally, you can opt for an asset-based loan. When opting for this type of financing, merchants will be putting their business, accounts receivables, real estate, and any inventory on the line.
Another option that may work in your favor would be looking into merchant grant funding options. The federal government has thousands of grants available to small businesses. Yours may qualify for funding.

Unlike a loan, a grants program offers monetary gifts that do not need to be paid back. Grant Approval would benefit your business’s cash flow tremendously and would allow you to pay back your merchant financing.

What if I Default on a Merchant Cash Advance?

Avoid defaulting on financing at all costs. You may be required to sign a personal guarantee when you sign off on a merchant cash advance. This means a financier will be able to pursue any personal assets, including your business to regain their advance funds.

Additionally, even though credit bureaus do not receive reporting on advance repayments, they will receive information for defaulted advances. This may not affect your credit but could make it more difficult for you to receive any future merchant financing.

Alternatives to Merchant Cash Advance

If a merchant cash advance does not seem to fit your funding needs, you can look into alternative options such as a small-business loan, short-term loan, or a line of credit. With these avenues, you will need to be able to provide good credit history to show your reliability and prove you are not a high risk to the lender. Credit bureaus will receive reporting for these types of lending services. With reliable repayment, you will be able to build your credit further.

You can speak to a merchant financier about your options. At ECS, we can assist you in determining which avenue would be the best route to take for your needs. One of our highly knowledgeable sales representatives would be happy to chat to get you the funds your business requires.

Please contact one of our knowledgeable account representatives for more information about merchant cash advances and to see if they are a good fit for you.

Shanna Sottosanto

Shanna Sottosanto

Content Writter

About ECS
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